1997 (9) TMI 83 - HC - Income Tax

Court rules against tax officer's valuation of rent-free accommodation, directs adherence to Rent Control Act.

The court held that the Income-tax Officer erred in valuing the perquisite of rent-free residential accommodation at Rs. 30,000 per annum without ... Rent Control Issues Involved:1. Whether 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 annumRs.Summary:Issue 1: Valuation of Perquisite for Rent-Free Residential AccommodationThe case pertains to the assessment years 1975-76, 1976-77, and 1977-78, where the assessee, an employee of Herdillia Chemicals Ltd., Bombay, was provided with free furnished residential accommodation. The employer valued the perquisite at Rs. 9,394 per annum. However, the Income-tax Officer (ITO) did not accept this valuation and computed the fair rental value at Rs. 2,560 per month, totaling Rs. 30,000 per annum, based on the prevailing rent in the area. The Appellate Assistant Commissioner approved the employer's valuation, but the Income-tax Appellate Tribunal reversed this decision, supporting the ITO's valuation based on Explanation 2 to rule 3(a)(iii) of the Income-tax Rules, 1962.Legal Provisions and Interpretation:Section 17 of the Income-tax Act defines 'salary' to include 'perquisite,' which encompasses the value of rent-free accommodation provided by the employer. Rule 3(a)(iii) of the Income-tax Rules outlines the method for valuing rent-free residential accommodation, stating it should ordinarily be 10% of the salary. However, if the rental value exceeds 20% of the salary, the value of the perquisite is adjusted accordingly. Explanation 2 to rule 3(a)(iii) allows the Assessing Officer to determine the fair rental value based on the rent a similar accommodation would realize in the locality or the municipal valuation, whichever is higher.Contentions and Court's Analysis:The assessee argued that the fair rental value should not exceed the standard rent under the Rent Control Act, and the Tribunal erred by considering the prevailing market rent. The Revenue contended that the fair rental value should be based on the prevailing market rent. The court, referencing Supreme Court decisions in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Mrs. Sheila Kaushish v. CIT, held that the fair rental value must be determined with reference to the standard rent under the Rent Control Act. The court emphasized that the fair rental value cannot exceed the standard rent, as any rent above this would be unreasonable and exploitative.Conclusion:The court concluded that the ITO was not justified in determining the fair rental value at Rs. 30,000 per annum without ascertaining whether it exceeded the standard rent. The Tribunal's confirmation of this valuation was also unjustified. The ITO should have either accepted the fair rental value disclosed by the assessee, which was higher than the municipal valuation, or determined it by applying the principles laid down in the Rent Control Act.Final Decision:The question referred to the court was answered in the affirmative and in favor of the assessee. The Tribunal may accept the fair rental value shown by the assessee or determine it by applying the principles of the Rent Control Act if not satisfied with the disclosed value. The reference was disposed of with no order as to costs.