TMI Blog2006 (9) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Rent Controller, then it is the duty of the Assessing Officer to determine the standard rent as per the provisions of rent control enactment, (vi) the standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV and not the standard rent. Thus, in our opinion, the Assessing Officer can take into consideration any circumstance which may inflate/deflate the fair rent u/s 23(1)(a) of the Act. If such rent is less than the standard rent, then the same shall be taken as fair rent, otherwise the standard rent shall be considered as fair rent u/s 23(1)(a) of the Act. Once the fair rent is so determined, then the applicability of section 23(1)(b) would have to be considered. If the actual rent received/receivable is higher than the fair rent, then the actual rent would be treated as ALV, otherwise the fair rent so determined shall be taken as ALV. In our opinion, the fair rent would be determined in accordance with guidelines provided by us in this order and the same would be considered as the reasonable rent u/s 23(1)(a). If actual rent is more than the fair rent then, actual rent would be considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 (the 'Act'). 2. Briefly stated, the facts of the case as stated in the order for assessment year 1998-99 are these: The assessee was the owner of Flat No. 51, NCPA Society, Mumbai which was let out of Swiss Bank Corporation on monthly rent of Rs. 50,000/- P.M. In addition, the assessee had also received interest-free deposit of Rs. 3.75 crores from the bank. In the return, the assessee declared the ALV at Rs. 6,00,000/-. The Assessing Officer was of the view that ALV declared by assessee could not be accepted considering the facts (i) the property was situated in the prime location, (ii) that flat was purchased in May 1991 for Rs. 1,94,35,409/- and as per price index, its value in this year would be Rs. 3,23,27,238/-, and (iii) the huge amount of interest-free deposit of Rs. 3.75/- crores was received. According to him, the notional interest on such deposit would form part of the rent which the assessee could fetch by letting out the property in the open market. The decision of Hon'ble Bombay High Court in the case of CIT v. J.K. Investors (Bombay) Ltd. [2000] 112 Taxman 107 relied on by assessee was distinguished by him by observing that the High Court it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he brokerage equal to the amount of rent for one month plus one month's interest @ 12 per cent per annum on interest-free deposit. On enquiry it was also found that in the same building in which assessee owned the flat, the British Dy. High Commissioner was paying rent of Rs. 20,40,000/- per annum for unfurnished flat of the same area. In view of these facts, Assessing Officer was of the opinion that interest on deposit had a direct bearing on the determination of the rent payable. Accordingly, he adopted the rent of Rs. 20,40,000/- for the flat as per the rent paid by the British Dy. High Commissioner in the same building and increased the same by sum of Rs. 45,00,000/- being the interest on interest-free deposit. Accordingly, the ALV for this year was taken at Rs. 64,45,000/-. 5. The matter was carried in appeal for all the years before the, Learned CIT (Appeals), before whom, following submissions were made: (i) That, there is no provision under the Act for determining the ALV by taking into consideration the notional interest on the interest-free deposits. It is only under the Wealth-tax Act, 1957, that the Legislature, in its wisdom, has specifically provided for tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Following the ratio in the case of Satya Co. Ltd. has not followed its own decision. Incidentally, the Bombay High Court in the case of J.K. Investors (P.) Ltd. 112 Taxman 107, has agreed with the views of the Calcutta High Court in the case of Satya Co. Ltd. In view of these facts, the Assessing Officer's action in taking the annual value in excess of the sum of Rs. 6 lakhs disclosed by the appellant is erroneous. In view of the above observations, the Learned CIT (Appeals) directed the Assessing Officer to re-compute the income from house property in accordance with the observations made by him. Similar orders were passed for all the years. Aggrieved by the same, the Revenue is in appeal before the Tribunal. 7. The order of the Learned CIT (Appeals) assailed by the Learned D.R. by making various submissions. At the outset, he agreed that in view of the judgment of Hon'ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd, the notional interest on interest-free deposit cannot form part of the actual rent received if the case falls under section 23(1)(b). However, it has been contended that section 23(1) provides that first reasonable rent of the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther, it was also contended by him that municipal valuation cannot be the final word for determining the ALV unless it is based on relevant material for determining the fair rent in the market. If there are sufficient materials on record for taking different valuation then, the Assessing Officer is not debarred from taking such different valuation. 8. On the other hand, the Learned Counsel for the assessee has vehemently supported the order of the Learned CIT (Appeals) by contending that notional interest cannot be added to the actual rent received in view of the judgment of the Hon'ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd. and the judgment of the Hon'ble Calcutta High Court in the case of Satya Co. Ltd. Proceeding further, it was submitted by him that in any case, the notional rent under section 23(1)(a) cannot exceed the standard rent as held by the judgment of the Hon'ble Supreme Court in the case of Mrs. Shiela Kaushish as well as in the case of Dewan Daulat Rai Kapoor v. NDMC [1980] 122 ITR 700 (SC). He also drew our attention to the later judgment of the Apex Court in the case of Dr. Balbir Singh v. MCD [1985] 152 ITR 388, wherein it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he did not proceed to determine the ALV under section 23(1)(a). On the contrary, he proceeded to determine the ALV under section 23(1)(b) by taking into consideration the actual rent received and the notional interest on interest-free deposit by observing at page 2 of his order the interest on deposit received by the assessee also partakes the character of the rent though not expressly called rent . Such approach is not supported by any case law. On the contrary, the Hon'ble Calcutta High Court judgment in the case of Satya Co. Ltd. clearly holds that notional interest cannot be added to the amount received. This judgment has been usefully referred and impliedly approved by the Hon'ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd. Therefore, the decision of the Assessing Officer in determining the ALV after taking into consideration the notional interest was contrary to the binding judgment of the High Court. He also failed to consider the effect of various judgments of the Hon'ble Supreme Court to the effect that ALV under section 23(1)(a) cannot exceed the standard rent where the property is governed by the Rent Control Legislation applicable to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogous to the expression in section 23 of the Act was considered by the Hon'ble Supreme Court in the case of Corporation of Calcutta v. Smt. Padma Devi AIR 1962 SC 151. Their Lordships at Page-153 observed as under: 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. On the same page, it was further observed as under: A combined reading of the said provisions leaves no room for doubt that a contract for a rent at a rate higher than the standard rent is not only not enforceable but also that the landlord would be committing an offence if he collected a rent above the rate of the standard rent. 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in the above decisions has been applied by the Apex Court for determining the annual letting value under section 23 of the Act in the case of Mrs. Shiela Kaushish v. CIT [1981] 131 ITR 435 on account of similarity in the provisions under the municipal enactments and section 23 of I.T. Act, 1961. Thus the ratable value, if correctly determined, under the municipal laws can be taken as ALV under section 23(1)(a) of the Act. To that extent we agree with the contention of the ld. counsel of the assessee. However, we make it clear that ratable value is not binding on the Assessing Officer. If the Assessing Officer can show that ratable 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. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. CIT [1975] 101 ITR 810. 15. The above discussion leads to the conclusions that -(i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances (ii) an inflated or deflated rent based on extraneous cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous methods like contractors' method could be taken into account. 17. The circumstances mentioned above are only illustrative and not exhaustive. Therefore, in our opinion, the Assessing Officer can take into consideration any circumstance which may inflate/deflate the fair rent under section 23(1)(a) of the Act. If such rent is less than the standard rent, then the same shall be taken as fair rent, otherwise the standard rent shall be considered as fair rent under section 23(1)(a) of the Act. Once the fair rent is so determined, then the applicability of section 23(1)(b) would have to be considered. If the actual rent received/receivable is higher than the fair rent, then the actual rent would be treated as ALV, otherwise the fair rent so determined shall be taken as ALV. 18. Now, the only issue, which remains for our consideration is, how to determine the ALV where the property let out is exempt from the provisions of rent control legislation. In such cases, in our opinion, the fair rent would be determined in accordance with guidelines provided by us in this order and the same would be considered as the reasonable rent under section 23(1)(a). If actual rent is more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rent was Rs. 25 to Rs. 50 sq.ft. per month but he adopted such rent at Rs. 50 per month on the premises that rent in the earlier year was much higher. However, no material was brought on record in support of such contention. Apart from this, there is nothing in the assessment order to indicate that any opportunity was afforded to the assessee to rebut the contents of such material. Such approach was erroneous being contrary to the principle of natural justice. Further, no exercise was made to determine the standard rent. Apart from this, no enquiry has been made whether the property in question was exempt from the application of the provisions of Maharashtra Rent Control Act, 1999, to which, the Learned D.R. drew our attention. Similarly, in assessment year 2002-03, no opportunity was given to the assessee to rebut the material procured by him for determining the ALV at Rs. 20.40 lakhs under section 23(1)(a). In these circumstances, we are of the view that the entire matter requires fresh adjudication in accordance with the legal position discussed by us in the preceding paragraphs. Accordingly, the orders of the learned CIT (Appeals) are, therefore, set aside on this issue and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case where a fresh loan has been raised to repay the original loan taken for the above purpose, the interest payable in respect of the second loan would also be admissible as a deduction under section 24(1)(vi). 3. The matter has been considered by the Board and it has been decided that if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income-tax Officer, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi). Perusal of the above shows that interest on the second loan has to be allowed if the Assessing Officer is satisfied that the second loan was obtained for repayment of the original loan which was obtained for acquiring of the property. It is not the case of Assessing Officer that the second loan was borrowed for repayment of the original loan. There is nothing in the circular to suggest that initial loan must be interest bearing loan. Therefore, we are unable to uphold the order of the Learned CIT (Appeals). The order of the Learned CIT (Appeals) is, therefore, set aside and consequently the Assessing Officer is directed to allow the deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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