' The first four appeals are directed against the consolidated order dated 30-9-1984 by the learned C.I.T. (A) Zone-1, Karachi in I T A No, C I T/Z1/1117, 349, 62, 624/81/83-84. The later four appeals are directed against the order dated 28-11-1987 by the learned A A C of Income-tax, D-Range, Karachi in I T A No,AAC/D/772, 773, 73, 235/87.
2. Mr. G.M. Gangat is present for the assessee (hereinafter referred to as the appellant) in all the appeals and Mr. Shahid Jamal, learned Departmental Representative is present for the Department.
3. The appellant has raised several grounds in the memo of appeals in the two sets of appeals but at the time of arguments Mr. G.M. Gangat has not pressed any other ground except the determination of annual letting value of the property under consideration. The annual letting value as declared by the appellant and as estimated by the I.T.O. For the assessment years under consideration is as follows: ASST YEARALV DECLARED ASSESSED BY ITO 1978-79 3,64,473 13,00,000 1979-8011,86,360 13,00,00 1980-8123,72,720 (21 months)31,50,000 1981-82 11,86,360 18,00,000 1982-8311,86,360 25,00,000 1983-8411,86,360 25,00,000 1984-8511,86,360 25,00,000 1985-8611,86,360 25,00,000
4. The Appellant is owner of property known as Hotel Metropole and the income from this property is assessed to tax under section 9 of the Repealed Income-tax Act, 1922 for the assessment year 1978-79 and under section 19 of the Income-tax Ordinance, 1979 for the assessment years 1979-80 onward. The controversy giving rise to these appeals is regarding the determination of the annual value of the property. The expression "annual value" has been defined in identical terms in subsection (2) of Section 9 of the Repealed Income-tax Act and section 19 (2) (b) of the Income- tax Ordinance, 1979. According to these definitions the annual value of any property shall be deemed to be the sum for which the property might reasonable be expected to let from year to year. The controversy about the determination of annual value of the property owned by the appellant was raised in previous years as well and the appeals pertaining to assessment years 1971-72 to assessm ent years 1974-75 being I T A No, 580/KB to 582/KB of 1974-75 were decided by a Division Bench of this Tribunal vide order dated 17-12-1976. Without going into details pertaining to the assessm ent years 1971-72 to 1974-75 it would be suffice to refer that for these assessment years the I.T.O. Determined annual value of the property at Rs,11,86,316 which was reduced by the A A C and the order of the A A C was reversed by this Tribunal and the value determined by the I.T.O. Was restored. It was held by learned Members of this Tribunal in the appeals referred to above that section 9 of the Income Tax Act allows the I.T.O. To determine the income according to the bona fide value which is the value for which the property is let out from year to year. The mandate of section 9 was that the I.T.O. Had to adjudicate every year as each year was an independent unit of assessm ent. The I.T.O., therefore, assessed the annual value of Hotel Metropole for the purpose of income-tax every year and determined the value for each year as already enumerated. While exercising his discretion of determining the annual value for the assessment year 1978-79 the I.T.O.
Gave finding as under: "INCOME ASSESSABLE U/S 9: ' Bona fide A.L.V. Of the property (lease rent, has been declared at Rs,3,64,473. In the assessment year 1975-76 A.L.V. Was estimated at Rs,11,86,360. Keeping in view the past history and co-related factors prevalent during the period under consideration, A.L.V. Is estimated as under:- ' Bona fide Annual Letting Value...Rs,13,00.000"
' The same annual value was adopted for the assessment year 1979-80. The annual value was again enhanced for the assessm ent years 1980-81 and 1981-82 at Rs,18,00,000 for the reason of time lapse and the inflation. The annual letting value was again enhanced to Rs,25,00,000 for the assessm ent years 1982-83 to 1985-86 on the basis of past year orders. The learned C.I.T. (A)/ AAC.
Of Income-tax confirmed the annual letting value as determined by the Assessing Officer for all the years under consideration.
5. Mr. G.M. Gangat, learned Representative for the appellant has conceded to the principle that section 9 of the Repealed Income-tax Act, 1922 and section 19 (2) (b) of the Income Tax Ordinance 1979 have invested jurisdiction in the I.T.O. For determining the annual value of the property but according to him this discretion is not to be exercised arbitrarily. Mr. Gangat has further conceded that the annual value of the property determined by local authorities, Excise and Taxation Department or any other authority is not binding on the I.T.O. However, restrictions placed by the rent restriction laws for the time being in force in a particular area are to be taken into consideration for the purpose of determining the annual value of the property. Mr. Gangat has placed emphasis on the definition of annual value which provides that it should be the sum for which the property might reasonably be expected to let from year to year. According to Mr. Gangat the words "reasonably expected to let from year to year" are to be kept in view while determining annual value of the property. The concept that the annual value of the property can be determined on mere hypothetical or notional considerations is not correct because it militates against the manifest intention of legislature expressed by using the word "reasonably expected to let from year to year". Mr. Gangat has contended that the dictionary meaning of reasonable is, something endowed with reasons, rational reasoning, moderate, fair, not extortionate, etc. Mr. Gangat has, therefore, submitted that if mere hypothetical basis is evolved and a notional annual letting value is determined without considering all the attending circumstances, restrictions and limitations placed by the law, legally and validly promulgated by the legislative authorities, such determination of annual value would not be reasonable and would not be in consonance with the intention of legislature. Such notional and hypothetical value would not fit in with the reasonable expectation of the property being let from year to year as intended by the legislature. Elaborating his contention Mi. Gangat has submitted that Sind Rented Premises Ordinance, 1979 is in force in all the urban areas of the province of Sind including Karachi, according to which certain restrictions have been placed on the landlords in respect of the charging of rent from the tenants already occupying the rented premises. According to section 9 of the Sind Rented Premises Ordinance, 1979 a landlord cannot enhance more than 10 % of the existing rent per annum before a period of 3 years has elapsed. Thus the law has fixed a ceiling of increase in the rent and every landlord is bound by this restriction. Under this provision of law the maximum rent which a landlord can expect to fetch is 10% above the existing rent after every 3 years. He has, therefore, submitted that the I.T.O. Was not justified in determining the annual letting value of property in question on general proposition of escalation in prices, inflation and increase in the rental value of properties. The moot point escaped the notice of the learned two officers below according to which they were required to determine as to what could be the expected reasonable value for which the property could be let from year to year. In doing so they have completely remained oblivious of the limitations placed by rent restriction laws. He has, therefore, submitted that the I.T.O. May be directed to determine the annual letting value in accordance with the provisions of rent restrictions laws, and only such increase may be made over and above the annual value determined by this Tribunal for the previous years which was to the tune of Rs,11,86,360. Mr. Shahid Jamal, the learned D.R. Has supported the two officers below.
6. We have carefully considered the contentions raised at the Bar. Since the learned representatives for the parties have not produced any ruling on the point in issue from the superior Courts in Pakistan and we are not able to lay hand on any such ruling, therefore, we have attempted to look into the law from the Indian jurisdiction. The annual value is defined is section 23 of the Indian Income-tax Act, 1%1 to be the sum for which the property might reasonably be expected to let from year to year. Thus, the definition of annual value is identical in the Pakistan Income-tax Ordinance, 1979 and Indian Income-tax Act,.
1961. It is, therefore, relevant to have resort to the view taken by the superior Courts in India. The point came for consideration before the Patna High Court in the case of Kashi Prasad Dataruka v. C I T (1975) 101 I T R 810 in which it was held that though the tax under the head "income from buildings" is a tax on income, it is well-settled that it is not a tax upon rents but upon the inherent capacity of the hereditament to yield profit. The standard selected is a measure of the amount of income to be taxed in respect of the building capable of occupation in the annual value. It was further held by placing reliance on two decisions of the Supreme Court of India in the cases of Corporation of Calcutta v. Padma Debi (AIR 1962 SC 151) and Guntur Municipal Council v. Gantur Town Ratepayers' Association (AIR 1971 SC 35) that the principle which is involved in determining what is the hypothetical rent which may be presumed for the hereditament in question, what is its inherent capacity to fetch by way of profit. If such a capacity is limited to the ceiling which is put by the order of the Rent Controller under the Rent Control Act, it is difficult to see on what basis a different reasonable annual letting value can be fixed in respect of such building for the purpose of determining annual value. It was finally held that for determination of the annual value the fair rent fixed by the Rent Control Act should be taken into consideration. The point in issue came for consideration before Delhi High Court in the case of C.I.T. v. H.P. Sharma (1980) 122I T R 675 and the entire case-law from the Indian jurisdiction was reviewed. In this judgment a reference was made to the ruling of Supreme Court of India in the case of Corporation of Calcutta v. Padma Debi (AIR 1962 SC 151) in which word "reasonable" was interpreted as follows: "The word 'reasonably' in the section throws further light on this interpretation. The word 'reasonably' is not capable of precise definition. Reasonable signifies in accordance with reason. In the ultimate analysis it is a question of fact. Whether a particular act is reasonable or not depends on the circumstances in a given situation. A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship, and such other considerations may take it out of the bounds of reasonableness. Equally it would be incongruous to consider fixation of rent beyond the limits fixed by penal legislation as reasonable."
' Another passage from the judgment of Supreme Court of India is relevant in this behalf in which it was observed: "One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the standard rent. A law of the land with its penal consequences cannot be ignored in ascertaining the reasonable expectations of a landlord in the matter of rent. In this view, the law of the land must necessarily be taken as one of the circumstances obtaining in the open market placing an upper limit on the rate of rent for which a building can reasonably be expected to let....But an open market cannot include a black market, a term euphemistically used to commercial transactions entered into between parties in defiance of law. In that situation, a statutory limitation of rent circumscribes the scope of the bargain in the market. In no circumstances the hypothetical rent can exceed that limit."
' In the case of Guntur Municipal Council v. Guntur Town Ratepayers' Association (AIR 1971 SC 353) it was held that: "The landlord could not lawfully expect to get more rent than the fair rent which was payable in accordance with the principles laid down in the Rent Control Act and the assessment of valuation must take int account the measure of fair rent as deductible under that Act. This might mean that where the Controller had not fixed the fair rent the municipal authorities would have to arrive at their own figure of fair rent but that could be done without difficulty by keeping in view the principles of the relevant rent control legislation."
7. It is provided in section 9 of the Sind Rented Premises Ordinance, 1979 that where the fair rent of any premises has been fixed no further increase thereof shall be affected unless a period of three years has elapsed from the date of such fixation and that the increase in rent shall not in any case exceed 10% per annum on the existing rent. It may be argued that under the above provision of Sind Rented Premises Ordinance the landlord is prohibited from receiving anything in excess of the existing rent when a fair rent is fixed by the Rent Controller and not before. Sections 4 and 5 of the Delhi Rent Control Act, 1958 also contain similar provisions which came for consideration before the Supreme Court of India in the case of M.M. Chawla v. J.A. Sethi (1970) 2 SCR 390 in which the legal position was summed up as follows: "In the case of rented premises the annual value shall not exceed the standard rent if fixed by the Controller or statutorily determined under the Delhi Rent Act and, in other cases where the standard rent has not been fixed or determined as aforesaid, the annual value shall not exceed the agreed rent unless the agreed rent is tainted by fraud, collusion, emergency, relationship and such other considerations.
' In the case of premises not let in the year of assessment but let at any time previous to it, the annual value shall not exceed the standard rent if fixed earlier by the Controller or statutorily determined under the Delhi Rent Act and, in the absence of such fixation or determination, the annual value shall not exceed the agreed rent in the earlier years."
8. It was further observed by the Hon'ble judges of the Supreme Court of India: "Where there is an actual tenancy, it is as if the hypothetical tenancy has materialised into actuality. The rent paid in pursuance of an agreement which is not tainted by fraud, emergency, relationship and such other considerations as are pointed out in Padma Debi's case (1962) 3 SCR 49 is a good measure of the rent for which any particular premises may reasonably be expected to be let within the meaning of the Municipal Act. Such agreed rent would be subject to the ceiling provided by the standard rent if it has been fixed by the Controller or has been statutorily determined under the relevant Rent Act. If such standard rent has not been fixed by the Controller or statutorily determined under the Rent Act, the agreed rent will be legally recoverable according to Chawla's case (1970) 2 SCR 390 and would not, therefore, be rent for which the premises cannot be reasonably expected to let."
9. After a resume of the case law it was observed by Justice S. Ranganathan at page 690 (1980) 122 I T R: "In our opinion, a lot of confusion and misapprehension is generated by a general assumption that the income from the property assessed for income-tax purposes is a notional income. We think it is a very broad statement. No doubt the statement is correct in the sense that the income from the property is assessed in the hands of the owner irrespective of the fact whether he actually derives any income therefrom or not. It is also true that in certain circumstances the rent actually derived by him may not be capable of being treated as the annual letting value of the property and in such a case the surplus amount realized by him will escape liability to tax altogether. But there is no reason to interpret the section in such a way that there is always or necessarily a gap between the actual rent derived and the reasonable rent which the property can obtain if let from year to year.
There is no reason why the actual rent derived on a monthly or annual basis between parties who deal with each other at arm's length should be ignored, although there may be a case for considering the actual rental income to be not sacrosanct where some circumstances exist to justify such an inference."
10. The same question came for consideration before the Supreme Court of India in the case of D.R.
Kapoor v. New Delhi Municipal Committee (1980) 122 I T R 700 wherein it was held as under: "The problem can also be looked at from a slightly different angle. When the Rent Control Legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the Legislature as unreasonable or excessive. When the legislature has laid down this standard of reasonableness, would it be right for the Court to say that the landlord may reasonably expect to receive rent exceeding the measure provided by this standard?
Would it be reasonable on the part of the landlord to expect to receive any rent in excess of the standard or norm of reasonableness laid down by the legislature and would such expectation be countenanced by the Court as reasonable? The legislature obviously regards 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? We are, therefore, of the view that, even if the standard rent has not been fixed by the Controller, the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent determinable under the Act and this would be so equally whether the building has been let out to a tenant who has lost his right to apply for fixation of the standard rent or the building is self-occupied by the owner. The assessing authority would, in either case, have to arrive at its own figure of the standard by applying principles laid down in the Delhi Rent Control Act, 1958, for determination of standard rent and determine the annual value of the building on the basis of such figure of standard rent."
11. A resume of the rulings from the Indian jurisdiction shows that the point of determination of annual value stands settled in India. Since the definition of annual value of the property is identical in the Pakistan and Indian statute, therefore, we are persuaded to follow with respect the dictum laid dow., by the Supreme Court of India as cited above. It is admitted position that the property under consideration in this case has been rented out and it is further admitted position that this Tribunal has fixed the annual value of the property at Rs,11,86,360 while deciding appeals for the assessm ent years 1971-72 to 1974-75. Prior to the promulgation of Sind Rented Premises Ordinance, 1979, the West Pakistan Urban Rent Restriction Ordinance, 1959 was in force in which there was no provision for increase in rent progressively. The provision for increase in the fair rent/existing rent was introduced for the first time in the Province of Sind with the promulgation of S. 9 of the Sind Rented Premises Ordinance, 1979. We are of the considered opinion that it would be anomalous to hold that on the one hand the Sind Rented Premises Ordinance, 1979 has placed restriction on the increase of rent and has fixed an upper ceiling of the enhancement of rent to the extent of 10% per annum after a lapse of three years and on the other hand the Assessing Officer has unrestricted authority to determine the annual value of the property ignoring rent restriction laws. The rent restriction laws are of binding nature on the landlord and, therefore, it cannot be easily countenanced that in spite of binding nature of the restriction placed under the Rent Restriction Laws a landlord can expect to let out the property for an amount exceeding the limits fixed by Rent Restriction Laws. The definition of annual value provided that the expectation of the sum for which the property may be let out should be reasonable we are of the opinion that the Courts are not empowered to attribute unreasonableness to the legislature. By means of Rent Restriction Laws the rent is pegged down to a particular ceiling. The expectation beyond that ceiling would amount to be unreasonable.
12. For the foregoing reasons the annual value fixed by the Assessing Officer in disregard to the rent restriction laws is held to be unreasonable and, therefore, it is set aside. The Assessing Officer is directed to determine the annual value of the property afresh in the light of provisions contained in the Sind Rented Premises Ordinance, 1979. For the sake of guidance of the Assessing Officer it is clarified that the annual value fixed by this Tribunal at Rs,11,86,360 may be taken as base and 10% increase thereon may be calculated for the assessment year 1978-79 which should be maintained for three years and thereafter 10% increase may be made after every three years.
13. All the above appeals are allowed to the extent and in the manner as indicated above.