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Annual value vs guideline value
November, 23rd 2006

The Government has always been sceptical about transactions in real estate. And its abiding suspicion is indeed not misplaced or exaggerated, what with black money playing a significant role in such transactions. Therefore, the owner of a building comes under the microscope of the tax authorities not only all through the period he owns it but even when it is disposed of. When he owns it and lets it out, he has to pay tax on a notional income, which broadly is actual rent or fair rent, whichever is greater.

This regime was put in place to checkmate the landlords who often took a hefty sum outside the books, as it were, to avoid tax. A ham-handed law with noble intent hits as much the noble-minded as it hits the deviants even if you charge less on charitable or sympathetic considerations from your tenant, the tax would be on the higher notional value. This regime is as old as the income-tax law in India itself is.

When one sold a building, there was no such presumption as to the consideration till the assessment year 2002-2003, except that in respect of high-value transactions consideration, for example, being in excess of Rs 75 lakh in Mumbai the Government had the right to make pre-emptive purchase at its discretion wherever it suspected under-declaration of the true consideration, with cash or other extraneous consideration accounting for the difference.

Stamp duty authorities

But with effect from the AY 2003-2004, guideline value fixed by stamp duty authorities is deemed to be the consideration uniformly in respect of all sale transactions big or small where the reported consideration is less in terms of Section 50C of the Income-Tax Act, 1961.

Stamp duty authorities have the reputation of going for the jugular with a high-pitched assessment both in a spirit of sadism as well as to worm into the hearts of the C&AG. But to the credit of Section 50C it must be said that it has at least put in place an authority to determine the guideline value, who is accountable to appellate authorities or, at the option of the assessee, to the valuation officer.

Market rent

No such authority is there to ascertain the market rent which normally corresponds to the fair rent contemplated by Section 23 while dealing with annual value. One wishes that the apex court, while casting its imprimatur on the concept of annual value and squelching all doubts on its constitutional validity in Bhagwan Das Jain vs UOI (1981 128 ITR 315), had ordained setting up of an authority akin to the one under Section 50C.

That this case arose in respect of a self-occupied house does not make it any less relevant in the context of debate on annual value, which applies as much to let-out houses as it does to the self-occupied ones. Such an authority could well be the stamp duty officer himself in which case he would be playing a dual role one for fixing rental value and another for fixing fair value of the property itself.

But having no authority at all leaves the assessee at the tender mercies of the assessing officer (AO). And to be fair to the AO, he cannot be expected to make a roving enquiry as to the fair rent, especially if the assessee has a house at a place which does not come under his jurisdiction. One hopes this omission would be made good at the earliest.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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