TMI Blog2011 (3) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... a rationale yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the Income Tax laws - Held that: If the assessing officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record - Appeal is dismissed - ITA No. 499 of 2008, 803 of 2007, 1113 of 2008, 388, 516, 1034 and 1240 of 2010 - - - Dated:- 30-3-2011 - MR. A.K. SIKRI, MR. MANMOHAN, JJ. Mr. Sanjeev Sabharwal, Sr. Standing Counsel.For Applicant Mr. C.S. Aggarwal, Sr. Advocate with Mr. Manish Sharma, Mr. Prakash Kumar and Mr. Vishal Malhotra, Advocates.For Respondant A.K. SIKRI, J. 1. Vide common orders dated August 16, 2010 passed in ITA No.803 of 2007, ITA No.499 of 2008 and ITA No.1113 of 2008, reference was made to the Full Bench. Since the issue involved in other appeals was also identical to these three appeals, the Division Bench referred those appeals also to the Full Bench to be heard along with these appeals. This is how all these appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an appeal there against before the CIT (Appeals). CIT (A) allowed the appeal and deleted the aforesaid addition. It was now the turn of Revenue to challenge the order of the CIT (A), which thereby preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal). However, that appeal of the Revenue has been dismissed by the Tribunal vide its impugned order dated 15.12.2006. Not satisfied with this outcome, the Revenue has preferred the instant appeal under Section 260A of the Act raising the following question of law: Whether the I.T.A.T. was correct in law in holding that notional interest on the interest free security deposits is not rent liable to be included in the income from house property under the Income Tax Act, 1961? The same substantial question of law also arose in the subsequent assessment years 2002-03 and 2003-04. 3. Section 22 of the Act deals with income from house property and states that annual value of the property of the description specified therein shall be chargeable under the head of income from house property. Section 23 of the Act provides the manner in which annual value of any property is to be determined for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dred rupees; (c) In the case of a building comprising one or more residential units, the erection of which is completed after the 31st day of March, 1978 but before the 1st day of April, 1982, for a period of five years from the date of completion of the building, be reduced by a sum equal to the aggregate of - (i) In respect of any residential unit whose annual value as so determined does not exceed two thousand four hundred rupees, the amount of such annual value; (ii) In respect of any residential unit whose annual value as so determined exceeds two thousand four hundred rupees, an amount of two thousand four hundred rupees; (d) In the case of a building comprising one or more residential units, the erection of which is completed after the 31st day of March, 1982 but before the 1st day of April, 1992, for a period of five years from the date of completion of the building, be reduced by a sum equal to the aggregate of - (i) In respect of any residential unit whose annual value as so determined does not exceed three thousand six hundred rupees, the amount of such annual value; (ii) In respect of any residential unit whose annual value as so determined exceeds three thousand six hu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner for the purposes of his own residence, the provisions of clause (a) shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf; (c) More than one house and such houses are in the occupation of the owner for the purposes of his own residence, the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (b), shall be determined under sub-section (1) as if such house or houses had been let. Explanation :- Where any such residential unit as is referred to in the second proviso to sub-section (1) is in the occupation of the owner for the purposes of his own residence, nothing contained in that proviso shall apply in computing the annual value of that residential unit. (3) Where the property referred to in sub-section (2) consists of one residential house only and it cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house shall be taken to be nil : Provided that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not adhered to the provisions of Section 23(1)(a) or Section 23(1)(b) of the Act, as he neither determined the annual value of the property as per Section 23(a) of the Income Tax Act nor by adopting the value as determined by the NDMC or in accordance with the provisions of the Delhi Rent Control Act, if applicable in the case of the assessee. Further, he had also not compared the actual rent received with the annual letting value (ALV) of the property determined under Section 23(a) for the purpose of the tax under Section 22 thereof. Applying the principle enumerated by it and as mentioned above, on the basis of various judgments, to the facts of the present case, the learned Tribunal held that notional income on account of interest free security deposits received by the assessee could not be considered for determining the ALV of the property. 4. Clause (c) of Section 23 (1) of the Act admittedly does not apply to the facts of these appeals, as none of these properties remained vacant during the whole or any part of the previous year. Properties remained let out during the entire year. Therefore, Clause (b) of Section 23 (1) of the Act comes into play. It was also conceded tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id down in the Delhi Rent Control Act is not applicable, as property in question is not covered by the Delhi Rent Control Act. The fault in both these approaches of AO as well as CIT (A) has been observed by the Division Bench in the following manner: 12. In this backdrop, the important question which arises for determination is: what is the fair rent of the properties, which were let out in the instant case? The mistake committed by the AO was that he did not address this issue and straightway proceeded to add notional interest on the interest free security deposit. On the other hand, the CIT(A) gave primacy to the rateable value of the property fixed by the Municipal Corporation of Delhi vide its assessment order dated 31.12.1996, as per which the rateable value of the property in question was fixed @ 2,02,240/- with effect from 01.04.1994, in the absence of any further assessment order having been passed by the MCD resulting in any enhancement in rateable value. The Tribunal, on the other hand, has observed that the fair rent of the property under Section 23(1)(a) can be decided on the basis of fair rent fixed by the local Municipal Corporation laws or under the Delhi Rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tch higher rent than the contractual rent, even when the contractual rent is more than the annual value fixed by the MCD. The question would be as to whether in such circumstances, he may ignore the annual value fixed by the Municipal authorities and come to a conclusion that the property would reasonably fetch a rent, which is more than the actual rent received? To put it otherwise, can the Assessing Officer, in such circumstances, take into consideration the notional interest to arrive at the same which the property might reasonably be accepted to let for year to year? If so, the next question would be whether it can be done in all cases or in some glaring cases like the present one where security deposit is not equivalent to six months to three years of rent but completely disproportionate to the actual contractual rent? Even if the notional interest is not to be added, can such a huge interest free security deposit (which does not appear to have any rationale with the agreed rent) be totally ignored while determining the fair rent which the property might reasonably be expected to yield? Or else, in a case like this, can it be inferred that the tenant paid part rent by giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the interest free security deposit . 11. The aforesaid conclusion is correct. We may record that permissibility of adding notional interest into actual market rent received was not approved by the Calcutta High Court in the case of Commissioner of Income Tax Vs. Satya Co. Ltd.[(1997) 140 CTR (Cal) 569] and categorically rejected in the following words: There is no mandate of law whereby the AO could convert the depression in the rate of rent into money value by assuming the market rate of interest on the deposit as the further rent received by way of benefit of interest-free deposit. But s. 23, as already noted, does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. This situation is, however, foreseen by Schedule III to the WT Act and it authorises computation of presumptive interest at the rate of 15 per cent. as an integral part of rent to be added to the ostensible rent. No such provision, however, exists in the Act. That being so, the act of the AO in presuming such notional interest as integral part of the rent is ultra vires the provision of s. 23(1) and is, therefore, unauthorised. Though what has been urged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the Revenue to draw an analogy from the Wealth Tax Act, 1957 is also to no avail. It is an admitted position that there is a specific provision in the Wealth Tax Act which provides for considering of a notional interest whereas Section 23(1)(a) contains no such specific provision. 13. We approve the aforesaid view of the Division Bench of this Court and Operative words in Section 23 (1)(a) of the Act are the sum for which the property might reasonably be expected to let from year to year . These words provide a specific direction to the Revenue for determining the fair rent. The AO, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the fair/market rent because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taken into consideration. It is clear from the following discussion therein: 6. With regard to question Nos. (5) and (6) which are only for the asst. yrs. 1984-85 and 1985-86 the further issue involved is whether any addition to the annual rental value can be made with reference to any notional interest on the deposit made by the tenant. When the annual value is determined under sub-cl. (a) of sub-s. (1) of s. 23 with reference to the fair rent then to such value no further addition can be made. The fair rent, takes into consideration everything. The notional interest on the deposit is not any actual rent received or receivable. Under sub-cl. (b) of s. 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money which is payable by the tenant for use of the premises to the landlord. Any advantage and/or perquisite cannot be treated as rent. Wherever any such perquisite or benefit is sought to be treated as income, specific provisions in that behalf have been made in the Act by including such benefit, etc., in the definition of the income under s. 2(24) of the Act. Specific provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Municipal Authorities can be a rationale yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the Income Tax laws. If there is a change in circumstances because of passage of time, viz., the annual value was fixed by the Municipal Authorities much earlier in point of time on the basis of rent than received, this may not provide a safe yardstick if in the Assessment Year in question when assessment is to be made under Income Tax Act. The property is let-out at a much higher rent. Thus, the AO in a given case can ignore the municipal valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the fair rent in the market and there is sufficient material on record for taking a different valuation. We may profitably reproduce the following observations of the Supreme Court in the case of Corporation of Calcutta Vs. Smt. Padma Debi, AIR 1962 SC 151: A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se appeals are, thus, dismissed on this ground. Once we hold this, the very basis adopted by the AO to fix annual letting value was wrong and therefore, no further exercise in fact is required by us in these appeals. 21. We would like to remark that still the question remains as to how to determine the reasonable/fair rent. It has been indicated by the Supreme Court that extraneous circumstances may inflate/deflate the fair rent. The question would, therefore, be as to what would be circumstances which can be taken into consideration by the AO while determining the fair rent. It is not necessary for us to give any opinion in this behalf, as we are not called upon to do so in these appeals. However, we may observe that no particular test can be laid down and it would depend on facts of each case. We would do nothing more than to extract the following passage from the Supreme Court judgment in the case of Motichand Hirachand Vs. Bombay Municipal Corporation, AIR 1968 SC 441: It is well-recognized principle in rating that both gross value and net annual value are estimated by reference to the rent at which the property might reasonably be expected to let from year to year, Vario ..... X X X X Extracts X X X X X X X X Extracts X X X X
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