TMI Blog2010 (8) TMI 1074X X X X Extracts X X X X X X X X Extracts X X X X ..... to the same tenant and interest-free security money of ₹ 2.20 crores was taken in respect of this tenancy. In this manner, total security deposit became available to the assessee at ₹ 10.78 crores. The AO came to the conclusion that interest on interest-free security deposit was an important fact for consideration while determining the fair rent within the meaning of s. 23(1)(a) of the Act. He, therefore, added a sum of ₹ 30.41 lakhs as notional interest, which would have been earned by the assessee on the aforesaid security deposit kept with the assessee by the tenant and included the same in the income of the assessee for the purpose of taxation. 2. The assessee filed the appeal there against before the CIT(A). 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 dt. 15th Dec., 2006. Not satisfied with this outcome, the Revenue has preferred the instant appeal under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so determined exceeds six hundred rupees, an amount of six hundred rupees; (b) In the case of a building comprising one or more residential units, the erection of which is begun after the 1st day of April, 1961, and completed after the 31st day of March, 1970, but before the 1st day of April, 1978, for a period of five years from the date of completion of the building, be reduced by a sum equal to aggregate of' (i) In respect of any residential unit whose annual value as so determined does not exceed one thousand two hundred rupees, the amount of such annual value; (ii) In respect of any residential unit whose annual value as so determined exceeds one thousand two hundred rupees, an amount of one thousand two hundred 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 amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as if the property had been let) which is proportionate to the period during which the property is in the occupation of the owner for the purposes of his own residence, or, as the case may be, where such property is let out in parts, that portion of the annual value appropriate to any part which was occupied by the owner for his own residence, which is proportionate to the period during which such part is wholly occupied by him for his own residence shall be deducted in determining the annual value. Explanation : The deduction under this sub-clause shall be made irrespective of whether the period during which the property or, as the case may be, part of the property was used for the residence of the owner precedes or follows the period during which it is let; (b) More than one house in the occupation of the owner for the purposes of his own residence, the provisions of cl. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be the position in respect of Adhichini property. He also relied upon the bye-laws of Municipal Corporation of Delhi as per which where the value of interest-free security deposit or advance is in the excess of six months' rent, an amount equal to 12.5 per cent of the amount, depending on the prevailing bank rate, shall be added to the amount of rent received by the landlord to determine the rateable value of the premises. On the basis of this formula, he worked out 12 per cent interest on the excess amount of security deposit and added a sum of ₹ 30.41 lakhs. 6. Before the CIT(A), the contention of the assessee was that the expression 'expected to let from year to year' as appearing in s. 23(1)(a) would mean that only standard rent or actual rent, whichever is higher, has to be adopted for the purpose of s. 23(a). In the present case, the annual rent was higher than the standard rent and, therefore, no addition could be made. The CIT(A) went by the rateable value of the property as fixed by the MCD, viz., ₹ 2,02,240 w.e.f. 1st April, 1994. On this basis, he opined that the actual rent was more than the said rateable value and therefore, as per s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was determined in the said case was formulated as under : The short point which arises for consideration in this appeal is : Whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling under s. 23(1)(b) of the IT Act, 1961 ? In other words, whether notional interest would form part of actual rent received or receivable under s. 23(1)(b) ? 9. It was answered in the following manner : The Tribunal has also found that the actual rent received by the assessee, even without taking into account the notional interest, was more than the annual value determinable under s. 23(1)(a) of the Act. This finding of fact has not been challenged by the Department in this appeal. On the contrary, the Department has contended that in this case, s. 23(1)(b) was applicable. They have not relied on the provisions of s. 23(1)(a). The question as to whether notional interest could have been taken into account under s. 23(1)(a) does not arise in this appeal and we do not wish to go into that question in this appeal. However, the moot point which needs to be considered in this case, is whether notion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike notional interest in this case, will not form part of the actual rent received as contemplated by s. 23(1)(b) of the Act. (Emphasis, italicized in print, supplied) 10. The important thing which is to be borne in mind by the AO, for doing the necessary exercise for the purpose of calculating ALV is to decide what is the fair rent of the property. If actual rent is more than the fair rent, then notional interest on the interest-free security deposit cannot be added. On the other hand, if the fair rent is more than the actual rent, then for the purpose of tax, the said fair rent of the property is to be taken into consideration. It is clear from the further discussion contained in the aforesaid judgment of the Bombay High Court in J.K. Investors (Bombay) Ltd. (supra) in the following manner : At the cost of repetition, it may be mentioned that under s. 23(1)(a), the AO has to decide the fair rent of the property. While deciding the fair rent, various factors could be taken into account. In such cases various methods like the contractors method could be taken into account. If on comparison of the fair rent with the actual rent received, the AO finds that the actual rent r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her hand, has observed that the fair rent of the property under s. 23(1)(a) can be decided on the basis of fair rent fixed by the local municipal corporation laws or under the Delhi Rent Control Act. 13. In the present case, concededly, provisions of Delhi Rent Control Act are not applicable, as the rent of the property was more than ₹ 3,500 per month. However, in such a case, can the annual value determined under municipal laws be treated as the fair rent for the purpose of s. 23(1)(a). More so, when the provisions contained in the Delhi Municipal Corporation Act for fixing annual value is pari materia with s. 23 of the IT Act. We find that identical exercise was done by the Calcutta High Court in the case of CIT vs. Satya Co. Ltd. (1997) 140 CTR (Cal) 569and on that basis, the Court opined that the fair rent fixed under the municipal laws, which takes into consideration everything, would form the basis of arriving at annual value to be determined under s. 23(1)(a) and to be compared with actual rent and notional advantage in the form of notional interest on interest-free security deposit could not be taken into consideration. It is clear from the following discussion the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r making any addition on account of so-called notional interest on the deposit made by the tenant, since there is no provision to this effect in s. 22 or 23 of the IT Act, 1961. 14. Insofar as permissibility of adding notional interest into the actual market rent received is concerned, it was turned down by the Calcutta High Court in no uncertain terms 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 Sch. III to the WT Act and it authorises computation of presumptive interest @ 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 ur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Revenue to draw an analogy from the WT Act, 1957 is also to no avail. It is an admitted position that there is a specific provision in the WT Act which provides for considering of a notional interest whereas s. 23(1)(a) contains no such specific provision. 16. The reading of the aforesaid case law brings out the following position insofar as considering of notional interest under s. 23(1)(a) of the Act is concerned : (i) The Bombay High Court in J.K. Investors (supra) left this question open. However, it categorically held that the AO was required to determine the fair rent which the property might reasonably be expected to earn. (ii) The Calcutta High Court as well as the Division Bench of this Court have categorically held that s. 23 does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. (iii) While doing so, the Courts have adopted the rateable value of the property to be calculated either under the Rent Control Act or under the municipal laws. 17. Insofar as the present case is concerned, the Delhi Rent Control Act is admittedly not applicable as the rent was more than ₹ 3,500 per month. No doub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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