Taxation Law

Commissioner of Income Tax v. Biman Behari Shaw, Shebait

[1968] 68 ITR 815 (Cal)

Facts

Banku Behari Saha executed a will dedicating several properties to two Hindu deities.
The disputed properties in Calcutta were used as temples or Thakurbatis for worship and connected religious purposes.
The will imposed restrictions upon their occupation and use.
In particular, it provided that:
only the priest performing worship and necessary servants could reside in one property;
the premises could not be used for ordinary public functions or unrelated purposes.
The properties were not actually let out and produced no rental income.
The Income Tax Officer nevertheless calculated a notional annual value based on the rent that the properties might fetch in the open market.
The Appellate Assistant Commissioner deleted the addition because:
the premises had not been let;
no income had actually accrued;
the restrictions in the will prevented ordinary letting.
The Tribunal agreed that the premises had no letting value.
The Revenue obtained a reference to the Calcutta High Court.

Whether property which is not actually let and produces no rent can still possess a taxable annual value.
Whether restrictions imposed by a will against ordinary letting completely remove the property’s notional annual value.
How the statutory expression “the sum for which the property might reasonably be expected to let from year to year” must be applied.

House-property income is based upon a statutorily defined annual value, not necessarily upon rent actually received.
A property may therefore be taxable even when:
it is vacant;
it is not actually let;
the owner receives no rent.
Annual value is a notional amount representing what the property might reasonably be expected to yield from year to year.
Legal or practical restrictions affecting letting are relevant in estimating the amount.
Such restrictions may substantially reduce the reasonable annual value.
However, the mere existence of a restriction does not automatically justify treating the value as nil.
The estimate must be objectively determined on the facts of the property.

The Tribunal proceeded from the view that because the will prohibited ordinary occupation and the premises were used for religious purposes, no letting value could exist.
The High Court held that this approach confused:
actual receipt of rent; and
statutory annual value.
Section 9 did not tax only the rent actually collected by an owner.
It imposed tax on an artificial or notional annual value fixed according to the statutory standard.
Therefore, absence of an actual tenant did not by itself eliminate taxability.
The restrictions in the will were important.
A hypothetical tenant could not be assumed to enjoy the premises free from those conditions.
Such restrictions could:
narrow the permissible users;
reduce commercial utility;
substantially lower the reasonable rent.
Nevertheless, the Tribunal had treated the restrictions as automatically reducing the value to zero without undertaking a proper objective valuation.
The High Court held that this was a legal error.
A restricted property may still possess some measurable annual value, even if that value is much lower than an unrestricted property.
The Court carefully avoided deciding a broader question:
whether a temple wholly and exclusively occupied by a deity and used only for the deity necessarily falls within the property-income provision.
That specific issue had not been properly referred for determination.
Its ruling was confined to rejecting the proposition that a non-letting restriction automatically created a nil annual value.

The Calcutta High Court held that the Tribunal had misdirected itself.
The fact that the properties:
were not actually let; and
were subject to restrictive conditions did not automatically mean that they possessed no notional annual value.
The restrictions had to be considered while objectively calculating the amount and might considerably reduce it.
The reference was answered in favour of the Revenue.
The Court did not conclusively decide the tax treatment of a temple wholly and exclusively occupied for the deity’s use.