Sankar Prasad Mitra, C.J. This is an appeal against a judgment delivered by A. N. Sen J., on July 24 and 25, 1975, dismissing an application under Article 226 of the Constitution.

The petition under Article 226 was affirmed on behalf of the appellant by an affidavit of Mohammad Khaliloor Rahaman sworn on the 11th March, 1965.

There were some amendments to the original petition and the amended petition, was reaffirmed by the same person on the 9th August, 1972.

In the petition, five several notices dated the 4th December, 1964, under section 148 of the I.T. Act, 1961, for the assessment years 1955-56 to 1959-60 were challenged.

It appears that the appellants income for the assessment years 1953-54 and 1955-56 were assessed on an agreed basis at a flat rate of 9 per cent, on the total turnover of each year.

The appellant is a registered partnership firm and carries on business, inter alia, in mining and export of manganese, chrome and other kinds of mineral ores.

On December 23, 1959, while the assessment for the assessment year 1956-57 was pending, the ITO made an ex parte assessment under section 23(4) of the Indian I.T. Act, 1922, for the assessment years 1957-58 and 1958-59.

The appellant preferred appeals against the ex parte assessment.

While the appeals were pending before the AAC, the appellant made an application before the CBR for settlement of its tax liabilities for the assessment years 1957-58 to 1959-60.

The revenue authorities made enquiries and investigations with a view to a settlement for the assessment years 1952-53 to 1959-60.

In December, 1959, the customs authorities searched the appellants business premises.

In 1960, the I.T. authorities inspected the books, papers and documents which the customs authorities had seized and were lying in the custody of the Chief Presidency Magistrate.

It is alleged that the I.T. authorities found certain discrepancies in various assessments.

On the 18th January, 1961, the ITO wrote to the appellant stating that as many as eleven categories of discrepancies in connection with pending assessment proceedings as well as the settlement petition had been found.

The discrepancy Number VIII which the ITO had referred to related to under-invoicing amounting to Rs. 29 lakhs.

The appellant gave its reply to the ITOs letter on February 25, 1961.

The assessments for the years 1952-53 to 1955-56 were reopened on March 3, 1961, under section 34 of the 1922 Act.

The tax authorities made investigations based on the allegations in the letter of the 18th January, 1961.

On the 27th March, 1961, a settlement was arrived at between the petitioner and its associate companies on the one hand and the CIT on the other, whereby the assessments and penalties of the petitioner were settled for the assessment years 1952-53 to 1959-60.

The total income was settled at Rs. 79,44,963 and the penalty at Rs. 2,72,332.

On March 4, 1963, an agreement was executed by and between the appellant and the President of India represented by the CIT, Central, Calcutta, whereby it was agreed that the appellant would pay the outstanding dues by monthly instalments of Rs. 25,000 with retrospective effect from October, 1962.

The case of the revenue before us is that information was received from the customs authorities in June, 1963, that as a result of their subsequent raids and seizures a large number of documents had been discovered which tend to show that during the years 1962 and 1963 there was under-invoicing by the appellant to the extent of nearly a crore of rupees.

Then came the crucial notices of the 4th December, 1964, for the assessment years 1955-56, 1956-57, 1957-58, 1958-59 and 1959-60, whereby the ITO proposed to reopen the assessments for these assessment years.

These are the notices, as we have already said, which have been challenged in the application under Article 226.

The appellant then addressed a letter dated the 26th December, 1964, to the CIT, West Bengal II, stating various facts and requesting the Commissioner to drop the proceedings started by the said notices of the 4th December, 1964.

The CIT, West Bengal II, by his letter dated the 25th February, 1965, informed the appellant that proceedings under section 148 of the 1961 Act had been started on information which was not there at the time the settlement was made in 1961.

The appellant then wrote to the ITO on the 2nd March, 1965, asking him, inter alia, to furnish the reasons and materials on the basis whereof the notices under section 148 had been issued.

The ITO by his reply dated the 3rd March, 1965, repeated the statements which the CIT had made on the 25th February, 1965, and requested the appellant to file returns pursuant to the said notices.

On the 8th March, 1965, the appellants solicitor wrote to the revenue authorities demanding justice.

On the 12th March, 1965, a rule was issued by this court and an interim order wa? passed that the appellant would file returns in terms of the notices under section 148 and thereafter all further proceedings under the said notices would remain stayed until further orders of this court.

This interim order was vacated by A. N. Sen J. on the 12th July, 1975.

Long arguments were advanced before us on behalf of the appellant.

Numerous decisions of the Supreme Court and of our court were placed before us.

The appellants counsel emphasised that before effecting the settlement the revenue authorities carried on the fullest possible enquiries and investigations and it was highly improper on their part to reopen assessments for years for which they had made settlements.

And the principles analogous to the principles of promissory estoppel should apply to this case.

It has been urged that no new source of income has been subsequently discovered.

After going through the judgment of the learned trial judge, it seems to us, on the facts and in the circumstances of the case, that the authorities relied on would not assist us in disposing of this appeal.

Let us go through some of the relevant provisions of the 1961 Act directly applicable to this appeal.

In Section 147(a) it is stated, inter alia, that if the ITO has reason to believe that, by reason of the omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for any assessment year, income chargeable to tax has escaped assessment for that year, he may, subject to the provisions, inter alia, of Section 148(2) and Section 151 assess or reassess such income.

Under this provision, therefore, the ITO has the power to reassess income if he has reason to believe that, by reason of the omission or failure on the part of an assessee to disglose fully and truly all material facts necessary for his assessment for any assessment year, income chargeable to tax for that year has escaped assessment.

But to take action under section 147(a) the ITO is subjected to various restrictions.

Sub-section (2) of Section 148 requires that the ITO shall, before issuing any notice under section 148, record his reasons for doing so.

There are further restrictions in Section 151.

Sub-section (1) of Section 151 provides that no notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied, on the reasons recorded by the ITO, that it is a fit case for the issue of such notice.

Sub-section (2) of Section 151 prescribes that no notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied, on the reasons recorded by the ITO, that it is a fit case for the issue of such notice.

In the instant case, for the assessment year 1955-56, the sanction has been given by the Board.

For the assessment years 1956-57 to 1959-60, the sanction has been given by the Commissioner.

After the appeal was argued before us for some time, the revenue authorities produced before us the ITOs report in connection with the starting of proceedings under section 147 of the 1961 Act.

In this report the ITO says that the cases fall under section 147(a).

In giving his reasons for starting proceedings under section 147(a) he has referred to a detailed investigation report which he had submitted on the 7th September, 1964.

We have gone through the relevant portions of this investigation report.

We set out below certain extracts from this report which speak for themselves.

At pages 7, 8, 9 and 10 of the copy of the report which has been handed over to us we find the following statements: A consolidated estimate of income escaping assessment as a result of under-invoicing in chrome and manganese ores during the assessment years 1954-55 to 1959-60, in the hands of M section Serajuddin Bros, and in respect of M section India Ferro Alloy Industries Private Limited, and M section Estate Minerals Development Company Private Limited is given below In the earlier part of this report, it has been mentioned that a settlement was effected between the department and M section Serajuddin Bros, (including M section India Ferro Alloy Industries (P.) Limited M section Estate Minerals Development Company (P.) Limited) on 27-3-1961, when the file was in Central Circle, Calcutta.

Apart from surplus in the balance sheet as prepared from undisclosed and unadjusted books of accounts relating to the assessment years 1957-58 to 1959-60, which was determined at rupees 26 lakhs (spread over in the above 3 years), a sum of Rs. 29.76 lakhs for on money as per seized personal note books written in the handwriting of Md. Serajuddin and a sum of Rs. 5.98 lakhs for inflation of expenses were also brought to tax under the terms of the settlement dt.

27-3-61, during the assessment years 1952-53 to 1959-60.

The extracts regarding on money recorded in the note books of Serajuddin revealed receipt of cash on various dates from a number of parties to whom sale of manganese and chrome ore was being made.

Code words were used for each party.

I have already furnished a settlement of year-wise receipt of on money from each party and these amounts were not found recorded in the books of account kept by the assessee.

However, in the absence of any particulars, this on money could not be co-related with reference to any particular contract or shipment.

It is also not known whether the above secret record of Serajuddin was full and complete and whether he had fully accounted for all the clandestine receipts for under-invoicing his exports to the foreign customers.

In the absence of definite evidence the amount included in the settlement assessments on account of on money cannot be admitted to represent part of the under-invoiced profits estimated in this report, unless the assessee furnishes points of evidence to prove his contention.

In the course of the settlement proceedings, the assessee did not admit this on money as representing extra sale proceeds from his foreign shipments, nor in the settlement deed dt.

It has been accepted that these secret extra amounts collected overseas in foreign currency have been repatriated to India by various means to form the subject-matter of the settlement.

In fact, in the settlement deed there is no mention at all of any evasion of tax due to under-invoicing of exports.

Even assuming that consideration may be given for the amount already included in settlement the final position would be as under: Asstt.

Total estimated under-invoicing Amount considered as on money in settlement Balance to be taxed now Rs. Rs. Rs. 1952-53 -- 33,000 Nil 1953-54 -- 6,34,000 Nil 1954-55 15,133 9,52,000 15,133 1955-56 4,52,947 2,25,000 2,27,947 1956-57 31,55,845 2,34,000 29,21,845 1957-58 34,13,030 6,08,000 28,05,030 1958-59 9,99,071 45,000 9,54,072 1959-60 7,33,490 Nil 7,33,490 From the above table it is apparent that even after making allowance for overlapping substantial income has escaped assessment and action Under section 147 is necessary to re-open the proceedings for the assessment years 1955-56 to 1959-60.

Conclusion:-- It is regretted that this report has become unusually lengthy on account of the complicated nature of the case and the huge revenue involved in this group.

The technique adopted by the cunning and ingenious devices adopted by the assessee required elaborate discussion on the entire background and operational activities of the business.

In the end, it is submitted that though every effort has been made to obtain and extract as much relevant material as possible from the seized books of account, it is not possible to say at this stage that the evidence collected is full and complete.

The volume of the seized records (about 2,000 files and documents) and the difficulties experienced in having access to the 1959 seizure books and also the fact that the records are kept somewhere else in the custody of other departments, are the factors responsible in this respect.

Moreover, in the course of the reopened proceedings additional material and facts may have to be gathered for which further references will have to be made to the seized records as and when necessary under these circumstances.

P. L. Kanojia, Income-tax Officer, A Ward, Dist. V(2), Calcutta.

7-9-64 Learned counsel for the appellant has urged before us that in the investigation report which has been shown to us, the ITO has merely made a proposal to reopen the assessments for the assessment years in question.

There is no indication at all in this report of the formation of any belief that due to the failure of the assessee to disclose fully and truly all material facts necessary for the assessment for the relevant years, the income chargeable to tax has escaped assessment.

On the basis of such an investigation report, therefore, neither the Board nor the Commissioner should have given sanction to reopen the assessments and as such all the purported notices under section 148 dated the 4th December, 1964, should be struck down.

Now, Sub-section (2) of Section 148 requires that before issuing any notice under section 148 the ITO must record his reasons for issuing the notice.

This subsection does not also require that he should state that he has formed the belief that, by reason of the omission or failure of the assessee, income has escaped assessment.

This belief of his can be inferred from the reasons recorded and the manner in which the recording has been made.

Each case has to be determined on its own facts.

This is a case in which at no point of time the assessee has produced on its own any books, papers or documents relating to the assessees income.

Some of these books, papers and documents were seen by the revenue authorities before the settlement was arrived at in 1961.

It is apparent from the report of the 7th September, 1964, that after the settlement the revenue authorities have examined other books, papers and documents which had not been either discovered or examined at all before the settlement and from the examination of these other books, papers and documents, the ITO has reached the conclusion in his report that the assessee had adopted cunning and ingenious devices in its operational activities which resulted in escapement of assessment.

Upon consideration of this investigation report of the 7th September, 1964, we are clearly of opinion that in the instant case all the requirements of Sections 147(a), 148 and 151 have been complied with before the issue of the notices under section 148 dated the 4th December, 1964.

Had this report been placed earlier before us, we would not have spent such a long time on this appeal.

The recorded reasons, in our opinion, establish sufficiently that there was failure on the part of the assessee to disclose fully and truly all material facts relating to the relevant assessments.

It is clear that many of the under-invoicings concerning transactions in chrome and manganese ores were not known to the I.T. authorities when they made the settlement in 1961.

We are, therefore, inclined to agree with the conclusions which the learned trial judge has reached.

We dismiss the appeal, discharge the rule that was issued by this court and dismiss the application under Article 226 of the Constitution.

Interim orders, if any, are vacated.

We are making no order as to costs.

We direct that an engrossed copy of the extracts from the investigation report of the ITO dated the 7th September, 1964, which have been placed before us, be kept in the records of this appeal and be preserved in this court.

We direct further that the revenue authorities shall preserve the entire records including the said report at least for a period of five years.

K. Datta, J. I agree.

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Sabyasachi Mukharji, J. We are concerned in this reference with the assessment year 1970-71.

The assessee is one of the co-owners of the house property known as Radia House situated in Bombay.

She had one-eighth share in the said property.

A part of the building, viz., two-thirds of the total floor area, has been in occupation of the tenants under certain lease agreements and the remaining one-third of the building has been in the occupation of the licensees under Leave and Licence system which has been in vogue in the State of Bombay.

It appears that the said system has been adopted by the house-owners so that the occupants could not claim statutory protection under the Rent Control Act and they could be evicted by the owners at their will.

It further appeared before the Tribunal that under this system the licence for occupation was generally given for a period not exceeding 11 months so that there might not be any possibility of the transactions being construed as lease.

As per the particulars furnished by the assessee, the area in the occupation of such licensees under the Leave and Licence system was 11,159.56 sq.

as against the area of 19,787.44 sq.

in the occupation of the tenants under regular tenancy agreements, the actual area of the building being 30,947 sq.

The actual receipts per year from the licensees by way of licence fees were Rs. 1,58,511.20 as against Rs. 86,036.86, being receipts from the tenants.

The total receipts from both categories of occupants were Rs. 2,84,548.08.

While furnishing these figures of actual receipts, the assessee claimed that the annual value should be determined not with reference to the actual receipts but with reference to the fair rent.

It was claimed that the sum of Rs. 86,036.86 being the rent received from the tenants for the portion of 19,787.44 sq.

in their occupation represented fair rent or rent which that portion might reasonably be expected to fetch and the fair rent which the portion of 11,159.56 sq.

in the occupation of licensees might be estimated proportionately at Rs. 48,544.09 as against the actual receipts of Rs. 1,58,511.20 realised from those licensees for that portion.

The assessee thus claimed the gross annual value of the property to be fixed as Rs. 1,34,580.97 (Rs. 86,036.86 plus Rs. 48,544.09).

The ITO, however, did not accept this claim of the assessee.

He took the actual receipts of Rs. 2,84,548.08 from both the tenants and the licensees as the annual value of the building and after giving the statutory deductions, determined the income from the house property at Rs. 1,70,916.

He assessed one-eighth share thereof, that is to say, at Rs. 21,356, in the hands of the assessee, she being the owner of one-eighth share of the property.

Being aggrieved by the said decision, the assessee went up in appeal before the AAC.

Before him, it was contended by the assessee that what was paid by the licensees for the portion in their occupation was in the nature of compensation and it could never be equated with the fair rent and that the net rateable value of the building, as fixed by the Bombay Municipal Corporation, should form the basis of computation of the annual value of the building under the I.T. Act, 1961.

In support of this contention, reliance was placed upon the order of the Bombay Bench Tribunal in two other appeals and reliance was also placed on certain observation of the Supreme Court in the Case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT, , that in some cases the actual receipts from the property might be in excess of its annual value.

On a consideration of the submissions made before him, the AAC held as follows : and as the principles which the annual value of the property in question have been decided by the Appellate Tribunal in Bombay, in the appeal of the co-owner as stated above by the learned counsel, it has to be held that the computation of the property in question made by the ITO is wrong.

He is, therefore, directed to compute the property income on the basis of its rateable value, subject to various outgoings as provided in Section 23(1) and 24.

He will accordingly compute the assessees 1/8th share in the income thus determined and substitute that share in place of Rs. 21,356 as adopted by the Income-tax Officer.

Being aggrieved by the aforesaid order of the AAC, the Revenue went up in appeal before the Tribunal.

On behalf of the Revenue, it was contended before the Tribunal that the Bombay Bench Tribunal was not correct in applying the theory of standard rent to that part of the building which was in the occupation of the licensees and holding that the standard rent of that area could not be more than the actual rent fetched from the other portion in the occupation of the tenants.

It was submitted that in the case of a tenant-occupied premises governed by the Rent Control Act, the standard rent as defined in that Act might be taken as representing the sum for which the premises might reasonably be expected to be let but in case of the premises not occupied by tenants only the commercial rent which the premises would fetch if let out in the open market should be taken as the sum for which it might reasonably be expected to let for the purpose of determination of the annual value under Section 23 of the I.T. Act, 1961.

Another argument of the Revenue was that what was collected from the so-called licensees in the guise of licence fees or compensation stood on the same footing as rent and that portion in the occupation of licensees must be presumed to fetch the same amount by way of rent if let out in the absence of any evidence to the contrary and the assessee had not adduced any evidence against that presumption.

These submissions are important and are to be borne in mind because same contentions have been raised on behalf of the Revenue before us.

We, however, do not think that these aspects raised on behalf of the Revenue, are very relevant or come within the ambit of the question referred to us.

But quite apart from that the contention raised on behalf of the Revenue before the Tribunal is also important and has to be borne in mind on this aspect.

Before the Tribunal, reliance was placed by the assessee upon another order of the Tribunal in the case of two other co-owners of the same property as also the decision in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, , which we have referred to hereinbefore.

Attention of the Tribunal was also drawn to the decision in the case of C.J. George v. CIT, .

The Tribunal, after considering the entire matter, was of the view that there might be some indication in which the income actually received from the property by the owner thereof in any year might exceed the notional figure representing its annual value.

The Tribunal referred to the decision of the Supreme Court and observed that there might be some cases in.

which the income actually received from property by the owner in any year might exceed the notional figure representing its annual value but these observations, according to the Tribunal, could not be understood as meaning that in every case the actual income received by the owner from property must be presumed to be in excess of its annual value.

The Tribunal was, therefore, unable to agree with the contention urged on behalf of the Revenue that the sum of Rs. 1,98,511.20 actually received by the assessee as licence fee or compensation from the licensees in occupation of a portion of the building comprising 11,159.56 sq.

ft. must be presumed to be the sum for which that portion of the property might reasonably be expected to let from year to year within the meaning of Section 23 of the I.T. Act, 1961, in the absence of any evidence to the contrary.

The Tribunal observed that this portion of the building had not been in the occupation of the tenants under regular lease agreements and this sum of Rs. 1,98,511.20 was in the nature of licence fee but not rent, in character.

Secondly, the Tribunal noted that the sum of Rs. 86,036.88 paid by the regular tenants in the occupation of the remaining area of 19,787.44 sq.

ft. was accepted by the ITO himself as representing the annual value of that portion of the building.

According to the Tribunal, this itself was proof of the fact that the sum of Rs. 1,98,511.20 paid by the licensees by way of licence fee for the lesser area of 11,159.56 sq.

ft. was far in excess of the sum for which that portion might reasonably be expected to let from year to year.

The Tribunal, therefore, was unable to accept the contention of the Revenue that the sum of Rs. 1,98,511.20 which was actually realised by the owners of the building by way of licence fees from the licensees in occupation of the lease area of 11,159.56 sq.

ft. must be presumed to represent the annual value of that portion of the buildings.

The Tribunal referred to the observations of the Supreme Court in the case of Nalinikant A. Mody v. Narayan Row, .

The Tribunal was of the view that in a case where there was controversy as to whether the income realised by the owner from the occupants of the property was in excess of the sum for which that property might reasonably be expected to let from year to year, one of the tests for resolving the controversy was to see how the annual letting value of the property was valued by the local authority for the purpose of taxation under the law by which that local authority was authorised to levy property tax.

In this connection reference was made to the observations of the Kerala High Court in C.J. George v. CIT .

Thereafter the Tribunal considering the matter noted that no argument was advanced as to why the controversy as to whether the actual receipt from the property during the year was not in excess of the sum for which that property might reasonably be expected to let from year to year could not be resolved with reference to the municipal rateable value of the property.

It was not suggested or contended that the municipal rateable valuation of the property was made without taking into account relevant consideration or that it was made on the basis of irrelevant consideration.

The local authority, i. e., the Municipal Corporation, was also a responsible body and, as was observed by the Kerala High Court, naturally, the said local authority was also interested in imposing as much legitimate tax as possible, -That being so, the Tribunal felt that in the absence of any material to show that the municipal valuation was not a safe guide for determining the annual value of the property, the Tribunal was inclined to hold that the AAC was justified in directing the ITO to determine the annual value of the property afresh with reference to its municipal rateable valuation.

Therefore, in this case what the Tribunal has done is to direct the ITO to determine the property income on the basis of annual value of the property with reference to the municipal rateable valuation.

Upon this decision at the instance of the Revenue under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following two questions to us : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 2,84,548 being the aggregate amount receivable by the assessee partly from the tenants in occupation of an area of 19,767.44 sq.

under regular tenancy agreements and partly from licence in occupation of an area of 11,159.56 sq.

under the leave and licence system could not be taken as the annual value of the property known as Radia House for the purpose of computing the income assessable under the head Income from house property ? Whether, on the facts, and in the circumstances of the case, the Tribunal was justified in directing the Income-tax Officer to redetermine the annual value of the property under Section 23(1) of the Income-tax Act, 1961, afresh with reference to its rateable value as determined by the Municipal Corporation ? The question, as we have indicated before, is whether in determining the annual value of the property known as Radia House for the purpose of computing the income assessable under the head Income from house property , the Tribunal was justified in directing that it should be done by the ITO keeping in view the municipal rateable valuation.

This question, in our opinion, has to be adjudicated in the light of the provision of law and on the clear authorities on this point.

Section 22 of the I.T. Act, 1961, enjoins that the annual value of property consisting of any building or lands appurtenant thereto of which the assessee was the owner, other than such portions of such property as he might occupy for the purposes of any business or profession carried on by him the profits of which were chargeable to income-tax, should be chargeable to income-tax under the head Income from house property .

That income from house property is to be computed as provided in Section 23 of the Act.

Section 23 of the Act, before its amendment with effect from 1st April, 1976, by the T.L. (Amend.) Act, 1975, which is not material for our present purpose, indicated that for the purposes of Section 22, the annual value of any property should be deemed to be the sum for which the property might reasonably be expected to let from year to year.

There was a certain proviso with which we are not concerned for our present purpose.

This Sub-section (1) of Section 23 was amended, as we have indicated before, with effect from 1st April, 1976, The amended provision, so far as it is material for our present purpose, leaving aside the proviso, reads as follows Annual value how determined.--(1) For the purposes of Section 22, the annual value of any property shall be deemed to be- (a) the sum for which the property might reasonably be expected to lot from year to year or (b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable It is important to bear in mind the difference introduced by the amendment.

But as we have indicated before we are concerned with the position prior to the amendment.

Therefore, we have to find out what is the annual value of the property and that would be on the basis for which the property might reasonably be expected to let from year to year.

Before we refer to certain judicial authorities we may in this connection refer to the provisions of the Bombay Municipal Corporation Act, rateable value and the section which deals with the valuation of the property assessable to property tax.

Section 154 of the Bombay Municipal Corporation Act, being Bombay Act Number III of 1888 provides as follows : 154.

(1) In order to fix the rateable value of any building or land assessable to a property tax, there shall be deducted from the amount of the annual rent for which such land or building might reasonably be expected to let from year to year a sum equal to ten per centum of the said annual rent and the said deduction shall be in lieu of all allowances for repairs or on any other account whatsoever.

The value of any machinery contained or situated in or upon any building or land shall not be included in the rateable value of such building or land.

Notwithstanding anything contained in this section, the rateable value in the case of building,-- (a) owned by or belonging to the Government or the Bombay Housing Board constituted under the Bombay Housing Boards Act, 1948, or other similar body constituted by any law for the time being in force for the purpose of providing housing accommodation (b) constructed, purchased or occupied on or after the 1st day of April, 1947, as part of a recognised scheme of subsidised housing for industrial workers or persons belonging to lower income groups or proper classes and (c) comprising in part or in whole of tenements let out to such workers or persons on a monthly rent, inclusive of all service and other charges not exceeding rupees thirty-two and fifty naye paise for each such tenement shall be fixed- with respect to such tenements comprised therein, with retrospective effect from the date of their construction, purchase or occupation as stated in Clause (b) on the actual rent charged for such tenements and not on the rent, for which such tenements might reasonably be expected to let from year to year less deduction of ten per cent.

of the said annual actual rent in lieu of all allowances for repairs or on any other account whatsoever and with respect to the remaining portions, if any, of such building, on the basis of the provisions of Sub-sections (1) and (2).

We are leaving aside the Explanation which is not necessary for our present purpose.

This principle, that is to say, that the value of any building or land assessable to property tax shall be reduced from the amount of the annual rent for which such land or building might reasonably be expected to let from year to year, seems to be more or less the basis both of the Calcutta Municipal Act and the Bombay Municipal Corporation Act upon which certain decision proceeded.

While on this, we may also refer to the provisions of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947.

Section 7(1) of the said Act was as follows: Rent (or licence fee or charge) in excess of standard rent illegal.--(1) Except where the rent is liable to periodical increment by virtue of an agreement entered into before the 1st day of September, 1940, it shall not be lawful to claim or receive on account of rent for any premises any increase above the standard rent, unless the landlord was, before the coming into operation of this Act, entitled to recover such increase under the provisions of the Bombay Rent Restriction Act, 1939, or the Bombay Rents, Hotel Rates and Lodging House Rates (Control) Act, 1944, or is entitled to recover such increase under the provisions of this Act.

Section 7(2) was introduced in a year subsequent to the year with which we are concerned.

Therefore, we need not consider Section 7(2).

We have to find out what is the annual value in order to make it assessable under the head Income from house property and whether such annual value could be anything more than the standard rent as enjoined under the Rent Act.

The principle applicable clearly emerges from the several decisions which we may presently note.

We may first refer to the decision in the case of Ganesh Chandra Khan v. ITO, .

The case was, however, concerned really with whether reopening under Section 148 was valid or not, in other words, whether the condition precedent as provided by Clause (a) of Section 147 for such reopening was there.

Dealing with this aspect of the matter and referring to several Supreme Court decisions at p. 940 of the report it was observed that a combined reading of the provisions of the Act and the Rent Control Act left no room for doubt that a contract for rent higher than the standard rent was not only not enforceable but also the landlord would be committing an offence if he collected rent above the standard rent.

Therefore, it was observed that if anything in excess of certain sum of money was realised by the assessee as the rent the same would not be the reasonable letting value of the property.

It was above the standard rent and could not be computed as income from house property.

In this connection reference was made to the decisions in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT, , Corporation of Calcutta v. Smt.

Padma Debi, , and the decision of the Supreme Court in the case of Guntur Municipal Council v. Guntur Town Rate Payers.

Association, , This question directly came up for consideration before the Kerala High Court in the case of C. J. George v. CIT, , a decision upon which the Tribunal relied.

There the assessee constructed a building which he let out to a company on an annual rent of Rs. 33,000.

The ITO fixed the annual value of the building at Rs. 33,000.

The Appellate Tribunal came to the conclusion that there was no material available to accept the contention of the assessee that the notional annual letting value was less than the sum of Rs. 33,000 for which the building had actually been let.

The Tribunal rejected the certificate produced by the assessee showing that the annual letting value had been fixed by the local authority at Rs. 18,000, It was held by the High Court that the Tribunal was not justified in holding that the rent received by the assessee represented the annual letting value of the building.

For the purpose of taxation it was not the actual amount of rent, according to the Kerala High Court, that must be taken into account but the sum for which the property might reasonably be expected to let from year to year, as provided by Section 23 of the I.T, Act, 1961.

The reasons given by the Tribunal for not accepting the certificate showing the annual letting value fixed by the local authority were not tenable.

Prima facie, the High Court felt that the certificate afforded evidence to sustain the contention of the assessee that the contract rent was in excess of the reasonable rent which could be expected from the building.

This question was looked into from a different point of view by the Madras High Court in the case of Addl.

CIT v. Mrs. Leela Govindan, 1978 113 ITR 136.

We may incidentally point out that Chief Justice P. Govindan Nair, who was a party to the judgment, was also a party to the decision of the Kerala High Court referred to hereinabove.

In this case the assessee purchased certain house properties in 1951 in respect of which there existed a lease dated December 20, 1935, for a period up to 1st of May, 1959, on a rent of Rs. 225 per month with an .option for renewal for a further period of 15 years.

The lessees had agreed to pay to the previous owners additional amounts so that the previous owners were getting a total sum of Rs. 6,226 from the lease.

The annual municipal valuations of the two properties were Rs. 7,502 and Rs. 10,374.

Accordingly, the ITO computed the income from these two properties under Section 23(1) of the I.T. Act, 1961, at Rs. 5,021 and Rs. 6,944 totalling Rs. 11,965.

The AAC on appeal accepted the assessees claim that the properties could not be let for any amount higher than Rs. 6,226 per annum during the period of the lease and accordingly arrived at the income from property after necessary deductions at Rs. 603.

The Appellate Tribunal agreed with this view.

On a reference to the High Court at the instance of the Revenue it was held that though the lessees might have sublet the building for a larger rent, what the assessee was entitled to get under the terms of the lease deed dated December 20, 1935, was only Rs. 225 per mensem which by persuasion had been slightly raised.

As it could not be said that the rent fixed under the lease deed was not genuine or had been fixed under the lease deed at a lower figure for some ulterior reason or other, it was not open to the Revenue to ignore the rent actually received by the assessee who could not claim more than that by reason of the lease deed subject to which alone he purchased the property and contend that the income should be computed on the basis of the annual value of the property which probably had been arrived at by the local authority on the basis of the rent received by the lessees.

Accordingly, the Tribunal was right in its conclusion.

The Division Bench of the Madras High Court held that the annual letting value would in certain circumstances, in view of the contract, be at a higher rent than the municipal valuation arrived at on the basis of rent received by the assessee.

This view cannot be accepted in view of certain subsequent decisions of the Supreme Court.

This question came up first before the Supreme Court in the case of New Delhi Municipal Committee v. M.N. Soi, AIR 1977 SC 302.

There the Supreme Court observed although legislative provisions for the fixation of standard rent in New Delhi contained in Section 9 of the Delhi Rent Control Act of 1958 were comparatively recent and fairly elaborate, yet the fixation of rates for purposes of assessment of house tax was still governed by the provisions of Section 3(1)(b) of the Punjab Municipal Act, 1911, enacted at a time when there was no machinery for the control of rents.

On a bare reading of the provisions of Section 3(1)(a), no doubt was left that, although, annual value, for purposes of rating land, may be linked to the assessment of land revenue, if the State Government so directs, yet, in the cases of houses or buildings, it was the reasonable expectation to let such buildings subject to certain reasonable deductions, which governed valuation, whatever might have been the origin of rating.

It is the same principle that has been mentioned in Section 154 of the Delhi Municipal Act which we have set out hereinbefore.

The Supreme Court went on observing where rent was higher than that which could be legally demanded by the landlord and actually paid by a tenant despite the fact that such violation of the restriction on rent chargeable by law was visited by penalty consequences, the Municipal authorities could not take advantage of this defiance of the law by the landlord.

Rating could not operate as a mode of sharing the benefits of illegal rack-renting indulged in by landlords for whose activities the law prescribed condign punishment.

It was not the expectation of a landlord who took the risk of prosecution and punishment which the violation of the law involved but the expectation of the landlord who was prudent enough to abide by the law that served as the standard of reasonableness for purposes of rating.

The Supreme Court observed that where fair rent relating to the house in question in New Delhi was fixed in 1941 under the New Delhi House Rent Control Order, 1939, and that fixation continued to be valid notwithstanding the repeal of the Control Order, even after the Delhi Rent Control Act 59 of 1958 came into force, the fair rent determined the standard rent which still effected the assessment of rates of the house in question for fixation of rates for assessment of house tax under the Punjab Municipal Act, notwithstanding the fact that the landlord was deriving at the time of fixation a much higher rent than the standard rent.

Therefore, the ratio of the said decision is that the annual value under the Municipal Corporation should be fixed on the basis of standard rent receivable by the houses in question.

This principle has been extended by the Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee, .

There also the Supreme Court observed that in relation to a building within the jurisdiction of the New Delhi Municipal Committee or the Corporation of Delhi, even if the standard rent had not been fixed by the Controller under the Delhi Rent Control Act, 1958, the landlord could not reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under that Act.

This would be so equally whether the building had been let out to a tenant who had lost his right to apply for fixation of standard rent or the building was occupied by the owner himself.

This principle, as the Supreme Court noted, would apply to self-occupied house and further when rent control legislation provided for fixation of standard rent which along and nothing more than which the tenant should be liable to pay to the landlord, it did so because it considered the measure of the standard rent prescribed by it to be reasonable.

It laid down the norm of reasonableness in regard to the rent payable by the tenant to the landlord.

Any rent which exceeded this norm of reasonableness was regarded by the Legislature as unreasonable or excessive.

The Legislature obviously regarded 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 ? This view was extended by the Supreme Court in the case of Mrs. Sheila Kaushish v. CIT, (Civil Appeal Number 1184 and 1185).

This has not yet been fully reported (since reported in, , and the relevant portion of the judgment with which we are concerned has been reported in the Statutes portion of the Supreme Court in, 1981 131 ITR (St.) 65, which reads as follows (see p. 442) : this was a decision given on the interpretation of the definition of annual value in the Delhi Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911, for the purpose of levy of house tax, but it would be equally applicable in interpreting the definition of annual value in Sub-section (1) of Section 23 of the I.T. Act, 1961, because these definitions are in identical terms and it is impossible to distinguish the definition of annual value in Sub-section (1) of Section 23 of the I.T. Act, 1961, from the definition of that term in the Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911.

We must, therefore, hold, on an identical line of reasoning, that even if the standard rent of a building has not been fixed by the Controller under Section 9 of the Kent Act and the period of limitation prescribed by Section 12 of the Rent Act for making an application for fixation of the standard rent having expired, it is 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 Sub-section (1) of Section 23 of the I.T. Act, 1961, must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant.

This interpretation which we are placing on the language of Sub-section (1) of Section 23 of the I.T. Act, 1961, may be regarded as having received legislative approval, for, we find that by Section 6 of the Taxation Laws (Amendment) Act, 1975, Sub-section (1) of Section 23 has been amended and it has now been made clear by the introduction of Clause (b) in that sub-section that where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to be the annual value of the property.

The newly added Clause (b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant.

On Section 154 of the Bombay Municipal Corporation Act, which we have set out hereinbefore, the Supreme Court has delivered a judgment dealing with the effect thereof in the case of Municipal Corporation of Greater Bombay v. Polychem Limited, .

There, the Supreme Court held that the land on which a building was being constructed did not cease to be rateable simply because the construction was going on upon it.

So long as a building was not completed or constructed to such an extent that at least a partial completion notice could be given so that the completed portion could be occupied and let out, the land could, for the purpose of rating, be equated with or treated as vacant land.

It was only when the building which was being put up in such a state which would actually and legally be capable of occupation that the letting value of the building would enter into computation for rating rebus sic stantibus.

Although the definition of land which was rateable covered three kinds of land, yet for the purpose of rating, according to the Supreme Court, Section 154 recognised only two categories.

Therefore, all lands must fall in one of those two categories for the purpose of rating and not outside.

This decision is important in view of the fact that this decision considered the effect of Section 154 and considered also the previous decision of the Supreme Court in the case of Municipal Corporation of Greater Bombay v. Royal Western India Turf Club, .

The Supreme Court in that decision had also referred to another decision of the Supreme Court in the case of Motichand Hirachand v. Bombay Municipal Corporation, .

In view of the fact that on behalf of the Revenue, reliance was placed on certain observations of the Supreme Court in the case of Motichand Hirachand, , it would be instructive to refer to the observations of the Supreme Court in the said decision at p. 442 which explains the entire position.

There the Supreme Court observed as follows : The assessing authority for the purpose of fixing the rateable value has, therefore, to determine the annual rent, that is, the animal rent for which such building might reasonably be expected to let from year to year and to deduct the 10 per cent.

statutory allowance therefrom and arrive at the net rateable value which would be equivalent to the net annual rent.

The rateable value is thus taken to be the same as the net annual rent of the property.

It is a well recognised principle in rating that both gross value and net annual value are estimated by reference to the rent at which the property might reasonably be expected to let from year to year.

Various methods of valuation are applied in order to arrive at such hypothetical rent, for instance by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to, the profits earned from the property or to the cost of construction.

The expression gross value means the rent at which a hereditament might reasonably be expected to let from year to year.

The rent which a tenant could afford to give is calculated rebits sic stantibus, that is to say, with reference to the property in its existing physical condition and to the mode in which it is actually used.

The hypothetical tenant includes all persons who might possibly take the property including the person actually in occupation, even though he happens to be the owner of the property.

The rent is that which he will pay in the higgling of the market, taking into account all existing circumstances and any relevant future trends.

If the property affords the opportunity for the carrying on of a gainful trade, that fact also must be taken into account.

The property is assumed to be vacant and to let and the material date for the valuation is that of the proposal which gives rise to the proceedings.

The actual rent paid for the property is not conclusive evidence of value, though such actual rent may serve as an indication as to what a hypothetical tenant can afford to pay.

However, if the actual rent is paid on terms which differ from those of the hypothetical tenancy it must be adjusted, if possible, to the terms of an hypothetical tenancy before it affords evidence of value.

(see Halburys Laws of England, 3rd Edn., Vol.

32, p. 60 and onwards).

It is also well recognised that while valuing the property in question every intrinsic quality and every intrinsic circumstance which tends to push the rental value up or down must be taken into consideration.

Therefore, the Supreme Court made it clear that the actual rent paid for the property was not conclusive evidence of value, though such actual rent might serve as an indication as to what a hypothetical tenant could afford to pay but no more.

Therefore, for the purpose of computing the income from house property, it must be done on the basis of Section 23 of the I.T. Act, 1961.

As we have mentioned before, we have to consider the position of Section 23 before the amendment effected with effect from 1st April, 1976.

This position has been made quite clear by the circular issued by the Board of Direct Taxes.

We may refer to Circular Number 204 dated 24th July, 1976, where dealing with this aspect of the matter, the circular stated as follows (see, 1977 110 ITR (St.) 21, 26) : Determination of annual value where the rent received exceeds the municipal valuation--(Section 23(1)).

Hitherto, the annual value of house property chargeable to income-tax under the head Income from house property was deemed to be the sum for which the property might reasonably be expected to let from year to year.

In many cases, however, the actual rent received or receivable in a year exceeds the municipal valuation of the property.

Sub-section (1) of Section 23 has been amended to provide that where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property.

Where the property is let out only for a part of the previous year, the annual rent for this purpose will be the rent received or receivable for a period of twelve months calculated on the basis of the average rent received or receivable for the period the property was actually let out.

This amendment has come into force with effect from 1-4-1976 and is, accordingly, applicable in relation to the assessment year 1976-77 and subsequent years (Section 6 (part) of the Amending Act).

Therefore, in a case where the actual rent received is higher than that for which the property might reasonably be expected to let from year to year in respect of an income accruing subsequent to the amendment different considerations might arise.

But we are not concerned with such a situation in the instant case.

Therefore, in view of that position and the municipal law and in view of the decision of the Supreme Court, it appears to us that the income from house property must be computed on the basis of the sum which might reasonably be expected to let from year to year and with the annual municipal value provided such a value is not above the standard rent receivable and that would be the safest guide for this purpose and the rent actually received would not be of any relevance.

On behalf of the Revenue, however, it was contended that the amount of money which was received was in respect of a transaction, though connected with property, it need not be confined to income from house property under Section 22 read with Section 23 of the I.T. Act, it could be taxed under Section 56 of the I.T. Act.

It is not possible to accept this contention for reasons more than one.

Firstly, that is not the question before us as we have set out the question.

Secondly, as we have set out the contentions urged on behalf of the Revenue before the Tribunal, it was the Revenues case that this compensation should be taxed as income on account of rent under Section 22 and, therefore, it is not open to the Revenue to contend otherwise now.

Quite apart from that fact, in law also, this position is not acceptable.

Reliance was placed on the decision of the Supreme Court in the case of S.G. Mercantile Corporation P. Limited v. CIT, 1972 83 ITR 700.

There, the assessee-company was incorporated in January, 1955.

One of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially.

Within less than two weeks of its incorporation, the company took on lease a market place for an initial term of 50 years undertaking to spend Rs. 5 lakhs for the purpose of re-modelling and repairing the structure at the site.

It was also given the right to sublet the different portions.

The assessee-companys activity during the period covered by the assessment years 1956-57 to 1958-59 consisted of developing, procuring and letting out portions thereof as shops, stalls and ground spaces to shop-keepers, stall-holders and daily casual market vendors.

The question was whether the assessee-companys income from sub-letting the stalls was assessable as business income under Section 10 of the Indian I.T Act, 1922, or as income from other sources under Section 12.

It was held that since the assessee-company was not the owner of the property or any part thereof, no question of making the assessment under Section 9 arose that the definition of business in Section 2(4) was of a wide amplitude and it could embrace within itself dealing in real property as also the activity of taking the property on lease, setting up a market thereon and letting out shops and stalls in the market.

The Supreme Court further held that, on the facts, the taking of the property on lease and sub-letting portions thereof was a part of the business and trading activity of the assessee-company and the income of the assessee-company fell under Section 10 of the Act, and that where, as in that case, the income could appropriately fall under Section 10 as being the business income, no resort could be made to Section 12.

The liability to tax under Section 9 of the Indian I.T. Act was of the owner of the buildings and of land appurtenant thereto.

In case the assessee was the owner of the buildings or land appurtenant thereto, he would be, according to the Supreme Court, liable to pay tax under Section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon.

It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing the landed properties and promoting and setting up a market thereon.

The residuary head of income should be resorted to only if none of the specific heads was applicable to the income in question.

It came into operation only after the preceding heads were excluded.

The narration of facts, in this case, would make it clear that the facts of the instant case are not coming within the mischief of Section 56, As we have mentioned before, the controversy before the authority below had all along been whether it was the business income or income from house property.

Here, on the other, hand, it was contended that it should be treated as extra compensation or extra rent and the money which was receivable apart from rent as licence fee should be taxed as income from house property.

Therefore, the observations of the Supreme Court cannot be of any assistance to the Revenue in aid of their submissions in this regard.

Reliance was also placed on the observations of Mr. Justice Ghose, as the Chief Justice then was, in the case of Mrs. Roma Base v. ITO, .

There the observations were made entirely in a different context.

What happened there was that a particular person who was a practising lawyer had died and after his death his wife received certain fees payable to the lawyer.

The question was whether such fees could be taxed, in view of the provisions of Section 176(4) of the I.T. Act read with Section 56 of the Act.

That is a controversy with which we are not concerned.

We are not concerned with the similar situation here arising out of Section 176(4) of the Act.

Therefore, the observation made in that decision cannot be of any relevance for the Revenue in the case before us.

Our attention was also drawn to the decision of the Gujarat High Court in the case of Sakarlal Balabhai v. ITO, 1975 100 ITR 97.

There our attention was drawn to certain observations of the court appearing at p. 106 where the court referred to the observations of the Supreme Court in the case of Motichand Hirachand v. Bombay Municipal Corporation, , which we have set out hereinbefore in the context in which the said observations were made.

As the actual facts involved in the said case before the Gujarat High Court were entirely different, we do not think we can derive much assistance from the said decision.

Reliance was also placed on certain observations of the Supreme Court in the case of CIT v. Piara Singh, .

There it was held that for a business loss, which was an illegal business, deduction could be allowable under Section 10 of the Act.

This proposition cannot be disputed.

The illegal gains from a business is certainly taxable.

But that, is not the issue before us.

Therefore, the observations of the Supreme Court in the said case cannot be of much assistance for the learned advocate for the Revenue.

Reliance was also placed on the decision of the Supreme Court in the case of Bhagwan Dass Jain v. Union of India, , and our attention was drawn to the observations of the Supreme Court at p. 319 of the report where the court referred to the observation of Lord Macnaghten in his celebrated judgment in Attorney-General v. London County Council, 1900 4 TC 265 1901 AC 35, Income-taxis a tax on income .

Our attention was also drawn to p. 320 of the report where the decision of the Supreme Court was referred to say what was the natural and grammatical meaning of the word income .

According to the dictionary meaning, it meant a thing that comes in .

Therefore, it was argued that, as the money came in, this amount should be taxable.

As we have mentioned, property income can be taxed as an income within the notion of Section 23(2) of the Act and that is the only head before the Tribunal and in that view of the matter, these observations cannot be of much assistance to the learned advocate for the Revenue.

Reliance was also placed on Strouds Judicial Dictionary as to what was the meaning of reasonable .

But this is not relevant for us.

Reference was also made to a decision of the House of Lords in Smart (Inspector of Taxes) v. Lincolnshire Sugar Company Ltd, 1937 20 TC 643, and our attention was drawn to the observations of Lord Macmillan appearing at p. 671 of the report.

But we are unable to find any relevance of the said finding to the facts of the case.

In the view we have taken and the reasons as we have mentioned hereinbefore, both the questions referred to this court are answered in the affirmative and in favour of the assessee.

Parties will pay and bear their own costs.

K. Banerji, J. I agree.

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