Section 23(1)(b) covers rent received or receivable; owner's annual value is agreed rent despite tenant subletting higher

HC held that post-amendment Section 23(1)(b) reaches rent received or receivable under the lease, so annual value is the rent agreed between owner and tenant even if the tenant sub-let at a higher rent. The Court rejected Revenue's construction that "receivable" should be limited, noting Legislature intended to tax amounts beyond standard rent by the 2001 amendment. Because Revenue did not prove the primary lease was sham, the owner's annual value is that rent received or receivable from the tenant. Appeal dismissed.

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Issues Involved:
1. Determination of Annual Letting Value (ALV) of the property.
2. Applicability of capital gains in computing profits under Section 115JA of the I.T. Act.

Detailed Analysis:

Issue 1: Determination of Annual Letting Value (ALV) of the property

The Revenue argued that the rent paid by the ultimate user (Reliance Industries Ltd.) should be treated as the ALV of the property rather than the rent received by the assessee from its tenants. The Revenue contended that the intermediate tenants were merely alter egos of Reliance Industries Ltd., and thus the higher rent paid by Reliance should be considered the real ALV. The Tribunal had dismissed the Revenue's appeal, relying on an earlier judgment, and had not addressed the issue of whether the agreement was sham and bogus.

The court examined Section 23(1)(a) and (b) of the I.T. Act, which states:
- (a) "the sum for which the property might reasonably be expected to let from year to year"; or
- (b) "where the property or any part of the property is let and the actual 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."

The court concluded that in the hands of the owner, the ALV can only be determined in terms of these clauses. The properties were situated in a place where the Rent Control Act was applicable, and the rent paid by the assessee and its tenant was more than the standard rent. Therefore, the ALV should be in terms of the agreement between the assessee and its tenants.

The court also addressed the Revenue's contention that the contract between the tenant and Reliance was a sham. This argument was not raised before the Tribunal, and thus it could not be considered at this stage. The court held that the ALV should be the rent received or receivable by the owner from the tenant, not the higher rent received by the tenant from Reliance.

Issue 2: Applicability of capital gains in computing profits under Section 115JA of the I.T. Act

The court referred to the Supreme Court judgment in Apollo Tyres Ltd. vs. Commissioner of Income-tax (2002) 255 ITR 273, which had addressed a similar question. The Supreme Court had ruled in favor of the assessee, holding that the capital gains should not be taken into account while computing profits liable to be taxed under Section 115JA of the I.T. Act. Based on this precedent, the court concluded that the question of law as framed would not arise.

Conclusion:

The court dismissed the Revenue's appeal, holding that:
1. The ALV should be determined based on the rent received or receivable by the owner from the tenant, not the higher rent received by the tenant from the ultimate user.
2. The capital gains should not be considered while computing profits under Section 115JA of the I.T. Act, in line with the Supreme Court's ruling in Apollo Tyres Ltd.

The questions of law framed by the Revenue were thus either not applicable or answered against the Revenue.

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