CHOWDHURY A. T. M. MASUD, J: This appeal, by special leave, is directed against the judgment of a Division Bench of the High Court Division, rejecting an application under section 66(l) of the Income-tax Act, filed by the assessee-appellant. The assessee, Mrs. Zebunnessa, has got a house at 119-A, Dhanmandi Residential Area, Road No. 2, Dacca, which she let out to the German Cultural Institute before the war of liberation at a monthly rent of Tk. 4,000 per month from 1st December, 1968 till 30th November, 1973. The house being in bad shape due to lack of case and repairs the tenants asked the assessee to suitably repair and renovate the house. At this stage Messrs Sonali Estate Agents, a registered partnership firm dealing with real estates, having its office at 380, Dhanmandi Residential Area, Road No. 27, Dacca approached the appellant with the proposal that they would under-- take and do all the necessary repairs, renovation, additions and improvement at their own cost and they would pay the appellant same rent of Tk. 4,000 per month as she has been getting for the house, on condition that they would be allowed to sub-let the house. The appellant readily accepted the offer and without renewing the tenancy with the German Culture Institute which expired on 30th November, 1973, let out the house to said Messrs Sonali Estate Agents, under a deed of agreement, for five years from 1st December 1973, at the same monthly rent of Tic. 4,000. The said Sonali Estate Agents after making necessary repairs and renovation of the house sublet the house to the German Cultural Institute for four years with effect from 1st January, 1974, at a rental of Tk. 15,000 per month. The appellant during the accountingyear ending on 30-6-1974, being the previous year for the assessment 1974-75, received rent from two sources via, from German Cultural Institute for five months from 1st July, 1973 to 30th November, 1973, and from Messrs Sonali Estate Agents, for seven months from 1st December, 1973 to 30th June, 1974, the rent remaining the same Tk. 4,000 per month.
2. The appellant was originally assessed to income-tax for the assessment year 1974-75 having the previous year ended on 30-6-1974, by the Income-tax Officer, Dacca Circle (J), Dacca, on 27-1-1915, in respect of her income from the aforesaid house property under section 9 of the Income-tax Act upon a 'bona fide annual value of the property (hereinafter called 'B. A. V.') of Tk 48,000. Thereafter in the month of June, 1976, the Inspecting Joint Commissioner of Taxes, Range-III, Survey and Recovery (North Zone), Dacca, purporting to act under section 34-A of the Act re-opened the assessm ent and re-assessed the income of the assessee-appellant taking the B. A. V. Of the property at Tk. 1,80,000 in place of Tk. 48,000 as determined by the Income-tax Officer.
3. The appellant objected in writing to the re-opening of the assessment under section 34-A of the Act, by her letters dated 19-7-1976 and 31-7-1976 contending therein that the Income-tax Officer having made the assessm ent with, full knowledge of all the material facts and after due consideration thereof, in absence of any fresh material, there was no scope to attract the provision of section 34-A. It was also contended that the bona fide annual value determined by the Income- tax Officer was correct and in accordance with the statutory provision of section 9 of the Act and that the Inspecting Joint Commissioners' determination of bona fide annual value at Tk. 1,80,000 is illegal and not based on any legal evidence.
4. The Inspecting Joint Commissioner of Taxes, however, rejected the objection. Against the said order the assessee took an appeal before the Income-tax Appellate Tribunal but without any success, Being aggrieved by the order of the Income-tax Appellant Tribunal the assessee- appellant pre--feered a Reference application under section 66(1) of the Income-tax Act, 1922, before the High Court Division, being Reference Application No. 28 of 1978, framing the following questions of law, that arose out of Tribunal's order
(i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the original order of the Income-tax Officer dated 27-1-1975, was erroneous in so far as it was prejudical to the interests of revenue and that the Inspecting Joint Commissioner of Taxes was correct in, assuming jurisdiction under section 34-A of the Act.
(ii) Whether on the facts and in the circumstances of the case, either the Inspecting Joint Commissioner of Taxes or the Appellate. Tribunal had any evidence to determine and was correct to determine the bona fide Annual Value of the Property at Tk. 1,80,000 in place of Tk. 48,000 determined by the Income-tax Officer after full consideration of all material facts."
5. The said application under section 66(1) was heard by a Division Bench of the High Court Division, who by their judgment and order dated 4-8-1980, rejected the reference application and ordered a fresh assess--ment on the findings (a) that the transaction through the third party disbelieved by the Inspecting Joint Commissioner of Taxes and the Tribunal, is a question of fact, which cannot be interfered with under section 66(1) ; (b) so far as the provision of section 34-A of the Income-tax Act is concerned the Inspecting Joint Commissioner of Taxes has wide powers to pass any order as the circumstances of the case may justify and in view of the aforesaid provision of law, did not commit any illegality in directing fresh assessment by the Income-tax Officer ; (c) that the Income- tax Officer is now required to make a fresh assessment but in making the assessment is required to follow annual value of the house, as has been assessed by the Inspecting Joint Commissioner of Taxes and the Tribunal, that is Tk. 15,000 per month.
6. The appellant thereafter filed a petition for special leave to appeal against the said judgment and leave was granted by this Court with the observation that "The learned counsel appearing for the petitioner submitted that the action of the Inspecting Joint Commissioner of Taxes is arbitrary, which is not contemplated under section 34-A of the Act. He further submitted that the decision of the Inspecting Joint Commissioner of Taxes which has been illegally affirmed by the Tribunal, is not based on any evidence or materials, but it is based on conjecture and surmise. The learned Counsel also submitted that the learned Judges of the High Court Division failed to appreciate the question raised by the assessee and erroneously rejected the application, holding that the questions raised are questions of fact which cannot be interfered with by the Court exercising its jurisdiction under section 66(1) .Of the Income-tax Act."
7. Syed Muzaffar Hussain, the learned counsel appearing for the appellant submits that the High Court Division erred in law on holding that thequestion raised in the reference application involves determination of fact which cannot be done in exercising jurisdiction under section 66(1) of the Income-tax Act. He argues that the real question` involved is the propriety of application of section 34-A and determination of bona fide annual value of the property under section 9 of the Act which constitute a question of law. It was contended that the learned Judges failed to appreciate the question raised by the assessee and erroneously rejected the application.
8. The question of law framed in the reference application called for examinations of provisions of sections 34-A and 9 of the Income-tax Act. For answering the reference the High Court Division was required to consider whether the order of the Income-tax Officer dated 27-1-1975 was erroneous and prejudicial to the interests of revenue, so as to empower the Joint Commissioner to assume jurisdiction under section 34-A and whether bona fide annual value was determined by him in accordance with the provisions of section 9 of the Income-tax Act The High Court Division answered the question without properly applying its mind to this aspect of the matter.
9. As regards section 34-A, it simply-held that Inspecting Joint Com--missioner had wide powers to pass any order as the circumstance of the case may justify including an order enhancing the assessm ent. The learned- Judges did not at all consider whether there were materials to justify the application of section 34.A. They failed to notice that power under section 34-A can exercised only when it is found that assessm ent was erroneous and prejudicial .4 to the interests of revenue. There must be some material before the Joint Commissioner for finding that the order of the Income-tax Officer was erroneous and prejudicial to the interests of revenue and mere observation to that effect is not sufficient to assume jurisdiction.
10. The dispute regarding annual value of a property, no doubt, is a question of fact but the question whether the determination of such value is based on evidence or whether it is in accordance with the provisions of section 9 of the Income-tax Act, is a question of law arising out of tribunal' order. The learned Judges failed to consider whether the Joint Commissioner and the Tribunal determined annual value in accordance with the provisions of section 9 of the Income-tax Act.
11. Syed Muzaffar Hussain, the learned counsel, appearing for the appellant argued that neither the Joint Commissioner nor the Tribunal had any material or evidence to determine the bona fide annual value of the property at Tk. 1,80,000 disregarding the evidence adduced by-the assessee-- appellant which was relied upon .By the Income-tax Officer.
12. Section 3 of the Income-tax Act provides that the total income of the assessee is liable to be taxed. Section 2(15) of the Act defines 'total income' as the total amount of income profits and gains computed in the manner laid down in the Act. So far as the income from property is concerned it is computed in accordance with section 9 of the Income-tax Act. According to this provision, income-tax shall be payable by an assessee, under the bead 'income from property' in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto, of which he is the owner. Under subsection (2) of section 9 it has been provided that the expression 'annual value' shall be deemed to mean the sum for which the property might reasonably be expected to be let from year to year. So the basis for assessment of tax is the determination of bona fide annual value of the property and for that the authority concerned is to determine the sun for which the property might reasonably be expected to be let from year to year, in other words, to determine the sum for which the landlord could let out the premises having regard to the condition of the property and all other prevailing circumstances including prevailing rents of similar house or house similarly situated. Valuation of holding by Municipal authority is also a material factor in determining the annual value. The Income-tax Officer in the instant case appears to have determined the bona fide annual value, on consideration of lease documents, showing prevailing rents of the neighbouring houses and also the valuation of the holding made by the Municipal authority. He was also aware of the fact that the house was let out to Sonali Estate Agents by the assessee and that the Agents in their turn let out the house to the German Cultural Institute, at a monthly rent of Tk. 15,000.
It appears that except the house in question for which the Sonali Estate Agents managed to obtain apparently a very high rent of Tk. 15,000 per month, none of the neighbouring houses, similarly situated, fetched any such high rent. The Municipal valuation of the property also lends 'support to the annual value as determined by the Income-tax Officer. There is nothing to show that the Income-tax Officer was not aware of all the relevant facts when he determined the annual value of the house in question and completed the assessment. It is not disputed that the Sonali Estate Agents is a registered partnership firm having its office in the city of Dacca and it is liable to taxation on the income earned by them from this house. If tax is realised from the Estate Agents for the income arising out of their letting of - the house at Tk. 15,000 per month there would be hardly any scope for any prejudice to the interests of revenue. Sonali Estate Agents is the direct tenant of the assessee-appellant, whom they pay Tk. 4,000 per month as rent. If the Estate Agents, who obtained permission for sub-letting the house, let out the house to any party, at a higher rent making a good. Profit for themselves, that profit cannot be included in the income of the assessee- appellant, who is receiving only Tk. 4,000 from the Sonaali Estate Agents as rent. It is contended by the asses see-appellant that the high rent at which the premises has been let out by the Sonali Estate Agents was due to the considerable improvement made by the Estate Agents to the house, at their own expense and due to their superior salesmanship and that the assessee-appellant has got nothing to do with it.
It has been noticed by the Tribunal that the Income-tax officer deter mined the bona fide annual value and assessed the tax after examining the leas;; agreement, municipal valuation register and other relevant papers.
13. Mr. Habibul Islam Bhuiyan, the learned counsel, appearing for the respondent failed to show that the Joint Commissioner had any fresh material before him, which was not within the knowledge of the Income-tax officer while determining bona fide annual value of the house. Mr. Bhuiyan, conceded that the Sonali Estate Agents would be liable to pay income-tax for the income they have been deriving by letting out the house at Tk. 15,000, per month to the German Cultural Institute, while, itself paying Tk. 4,000 as rent to the owner, the assessee-appellant.
14. The Inspecting Joint Commissioner and the Tribunal did no believe the genuineness of the sub- letting of the house by the Sonali Estate Agents. Holding that the transaction smacks of collusion, they took the view that the said Sonali Estate Agents was actually a contractor for collecting rent on behalf of the assessee-appellant but that view is based on no evidence. There is no material to hold that the agreement between the Sonali Estate Agents and the assessee-appellant was a collusive one to deprive the Govern--ment of the revenue.
15. In the circumstances, we find that the bona fide annual value determined by the Income-tax Officer was in accordance with law and the tax assessed by him on the assessee-appellant was neither erroneous nor prejudicial to the interests of revenue and as such the Inspecting Joint Commissioner of Taxes was not correct in assuming jurisdiction under section 34-A of the Act. The High Court Division did not answer the reference correctly. For the aforesaid reasons the judgment of the High Court Division is set aside. The question is answered accordingly as indicated above.
SHAHABUDDIN AHMED, JI have gone through the judgment proposed to be delivered by my learned brother Masud, J. Though I agree with the ultimate order proposed to be passed allowing the appeal, I would like to give my own reason.
17. The assessee, who is an individual, let her house to an intermediary namely Messrs Sonali Estate Agents, at a rent of Tk. 4,000 per month and the intermediary sub-let the house to the German Cultural Institute at a rent of Tk. 15,000 per month. The assessee who is alone the owner of the house, is liable to pay income-tax in respect of "the annual value" of the house within the meaning of subsection (2) of section 9 of the Income-tax Act. "Annual value" as defined there "shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year". It is clear that it is the value of the property on which the owner is liable to assessment, and whether the owner actually receives the rent wholly or in part is not a matter for consideration when income from property is assess under section 9 of the Income-tax Act. In this case the assessee received yearly rent of Tk. 48,000 while the sub-lessee received yearly rent of Tk. 1,80,000.
The Income-tax Officer made assessment on Tk. 48,000 not on 1,80,000. As such, prima facie, there was -an alarming under assessment and in such circumstances the Inspecting Joint Commissioner got ample jurisdiction under section 34-A to call for and examine the record of the Income-tax Officer whose assessm ent was apparently erroneous and prejudicial to the interest of the Revenue. In fact, whether the bona fide annual value of the property was, to be determined on the rental of Tk. 48,000 or on the rental of Tk. 1,80,000 was the crucial question for the determination of which the matter was brought up to this Court. So to reopen the assessment no fresh or further material was necessary.
18. This tax is leviable on the bona fide `annual value' of a property. The annual value of a house property is ordinarily the rent at which the house is let or expected to let to a tenant but the actual rent received ma riot be the annual value of the property; actual rent is a very material facto for the taxing authority to consider in determining the annual value. "Annual value" as contemplated in section 9(2) is a notional rent which is to b gathered from what a hypothetical tenant would pay for the property undo assessm ent. In a case where the cost of essential maintenance of the house, which is the owner's responsibility, is borne by the tenant, such cost should be added to the rent received by the owner in order to determine the annual value. In some cases, the municipal valuation of the property may be accepted by the Income-tax Authorities as annual value for their purpose as well. The actual rent received by the owner, if it is found to be genuine, is usually the annual value of the property. In this case two divergent amounts of rent are being received, Tk.
48,000 by the owner, and Tk. 1,80,000 by the lessee. The Department expressed doubt as to the bona fide of the sub-lease contending that it might be a device to evade assessment to the full extent. But I would assume that the sub-lease is genuine and that the owner received Tk. 48,000 only a year and then see whether in this admitted position the owner is liable to be assessed on the whole amount of Tk. 1,80,000 the two-thirds of which she does not receive as her share of the rent.
Mr. Habibul Islam Bhuiyan, relying upon section 9(1), contends that it is the entire income from property which is taxable and whether the owner derives the entire income or not is immaterial. Mr. Habibul Islam Bhuiyan has relied upon two decisions,' one reported in 9 1 T R 695-696 (P C) and the other in 14 1 T R 298 (Bom.). In the former, it has been held that "owner in section 9 is the owner of the property". In the latter, it has been held that "the fact that the owner receives no income in fact or even that there is no possibility of his receiving the income is irrelevant for the consideration of the question as to what the artificial or statutory income of an assessee is from property". I find hardly anything to disagree with the views taken in those cases, and I think there can hardly be any question that under section 9 it is the owner alone who - is liable to be assessed. Section 9(1) does no speak of any sub-lease or sub-letting of a house so as to divide its rent between the owner and the lessee. It provides that the whole of the income designated as "income from property" is taxable and that the owner of the property is alone liable to pay tax thereon. This section reads thus : "The tax shall be payable by an assessee under the head "income from property" in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner". And as to the annual value of the property, Mr. Bhuiyan referred to section 9(2) and contended that it is the entire sum of money which is or expected to be fetched as rent by letting the property. What be tries to argue is that the letting value of the house in question being Tk. 1,80,000 a year, this entire amount is liable to assessment under section 9 ; apportionment of the tax between the owner and the lessee is a matter between themselves in which the taxing authorities have no concern. Mr. Habibul Islam Bhuiyan contends that the position of a lessee who stands between the owner and the actual tenant-occupant of the house is that of a rent-farmer or collector of rent on behalf of the owner. 1n other words, the intermediary acts as an agent of the owner so as to derive higher amount of rent by better bargaining, and what he pays to the owner is not the actual rent but which is paid by the sub-lessee-occupant is the actual rent, on the basis of which value of the property is to be determined. Mr. Bhuyan, in support of this contention, has referred to tile case of Jamnadas Prabhudas v. Commissioner of Income-tax, Bombay City ((1951)
20 1 T R 162). In that case the Income-tax Appellate Tribunal took the view that the intermediary between the owner and the actual tenant is an agent of the owner and not a tenant. But in that case the lease agreement between. The owner and the lessee itself contained the provision that the owner gave rent farming contract to the lessen. In the instant case the sub-lessee, German Cultural Institute, is occupant of the house paying the rent of Tk. 1,80,000 a year. If the German Cultural Institute is the actual tenant, the assessee being owner of the property is liable to be assessed for the rent derived front the actual tenant, that is Tk. 1,80,000 a year, it being immaterial whether she receives that amount or not.
19. But contention of Mr. Muzaffar Hussain, learned Advocate for the assessee is that Messrs Sonali Estate Agents, is a Company or a business firm carrying on business for the purpose of earning profit by taking lease of house properties and sub-letting them. In this case Messrs Sonali Estate Agents, Mr, Hussain argues, has earned profit to the extent of Tk. 11,000 per month by realising Tk, 15,000 per month from the sub-lessee and paying Th. 4,000 to the owner and that this profit is their income from business which is liable to be assessed under section 10 of the Income-tax Act under the head : income from business, profit or gain. Mr. Hussain contends that this income is not income from property to he assessed under section 9. Of course, there may be case, though very rare in this country, where sub--letting of house properties may take the nature of business or trading operation. An example of such a business is found in the case of S. G. Mercantile Corporation Limited v. Commissioner of Income-tax (83 1 T R 700). There the Indian Supreme Curt considered the definition of the word 'business' in section 2(4) of the Income-tax Act and observed that "the definition is wide enough to embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market". Facts of that case are that a Company took on lease a market place in the City of Calcutta from its owner on monthly rent of Rs. 3,000 for a period of fifty years. The Company then spent Rs. 5 lacs for remodelling and re-constructing the structure on the site and after necessary re-construction and development let out portions of the same as shops, stalls and ground spaces. In those circumstances it was held that "all these facts point to the conclusion that the taking of the property on lease and sub-letting portion of the same was part of the business and trading activities of the appellant------------and the acquisition of the property on lease and sub-letting of the shops and stalls was in the course of business and trading operation of the assessee".
20. In the instant case there is nothing on record to show that the activities of the lessee, Messrs Sonali Estate Agents, consist in business an trading or at least there is no evidence that any investment was made or structural change or remodelling of the house was effected by the lessee in the house which was simply sub-let at a much higher rent. Except normal repair hardly anything was found done by the lessee who simply sub-let the house at a higher rent by, what Mr. Hussain submitted, "superior salesmanship". In sub-letting a residential house there is hardly any scope for superior salesman ship. In the absence of any business activities on the part of the lessee in respect of this house, the Department got reasonable grounds to doubt the genuineness oh Eye claim as to the sub-lease. If the bulk of the house-rent is allowed to escape assessment under section 9, flood-gate of sub-letting ma open up and in many cases intermediary tenants will be set up in order to avoid assessm ent according to law.
21. Mr. Hussain has submitted that for the rent derived from the sub lessee, the lessor, Sonali Estate Agents, will be liable to pay tax on "business profits" in respect of the excess amount over Tk. 48,000.
But Messrs Sonali Estate Agents is not a party to this case and when their turn comes they may take the stand that the entire rental value of the house is assessable only as income from property for which the owner alone is liable to pay the tax. It may be mentioned that section 6 classifies incomes which are chargeable to this tax into six specific and distinct "heads" and that these heads of incomes are chargeable under different provisions of the Income-tax Act. It is clear that income under one head cannot be brought under another head to be assessed for the tax. Mr. Habibul Islam Bhuiyan has submitted that this case is a new one of this nature and the Department has never come across any case of house-rent from sub-lessees. It appears that the matter was not properly enquired to ascertain whether the activities of the intermediary Messrs Sonali Estate Agents are embraced within the definition of business. Such an enquiry may be held even now, and/by an enquiry activities of the lessee are found to include business, the lessee may be separately assessed a such, and the owner will be assessed under the head-income from property to the extent of Tk. 48,000, a year. For this purpose remand is necessary.
I would, therefore, allow the appeal, set aside the impugned assessment and leave the question of assessm ent open for determination by the Department in the light of the observations made above, No order as to costs.