2005 (9) TMI 554 - AT - Income Tax

Summary

Issues Involved:

1. Whether notional interest on an interest-free deposit received by the assessee from the tenant should be included in the fair rent under section 23(1)(a) of the Income-tax Act, 1961.
2. Determination of the Annual Letting Value (ALV) for a vacant property.
3. Allowance of long-term capital loss to be carried over to subsequent years.

Issue-wise Detailed Analysis:

1. Notional Interest on Interest-Free Deposit:

The revenue contended that the CIT(A) erred in deleting the interest of Rs. 37.50 lakhs calculated on an interest-free deposit and furniture received by the assessee as part of the rent in calculating the fair market value of the house property under section 23(1)(a) of the Income-tax Act, 1961. The common question raised was whether notional interest from a deposit of Rs. 2.50 crores received by the assessee from the tenant forms part of the fair rent under section 23(1)(a).

The CIT(A) deleted the addition, relying on the decisions of the Hon'ble Calcutta High Court in CIT v. Satya Co. Ltd. and the Hon'ble Bombay High Court in CIT v. J.K. Investors (Bombay) Ltd., which held that notional interest would not form part of the actual rent received or receivable under section 23(1)(b).

The Tribunal observed that the Assessing Officer (AO) made the addition under section 23(1)(a) and not under section 23(1)(b). The AO's duty is to determine the fair rent under section 23(1)(a), which he did by adding notional interest on the interest-free deposit. The Tribunal followed the decisions of the Hon'ble Calcutta and Bombay High Courts, which excluded notional interest from the actual rent under section 23(1)(b). However, the Bombay High Court left open the question of whether notional interest could form part of the fair rent under section 23(1)(a).

The Tribunal identified several infirmities in the CIT(A)'s order, including the lack of a categorical finding on the applicability of the Bombay Rent Control Act, the failure to determine the standard or fair rent as per section 11 of the Bombay Rent Control Act, and the lack of examination of comparative instances or other methods to fix the fair rent. The Tribunal set aside the CIT(A)'s order and restored the matter to him for a fresh decision in accordance with the law, keeping in view the observations made.

2. Determination of Annual Letting Value for Vacant Property:

For the assessment year 1997-98, the assessee argued that its property at NCPA was vacant throughout the year and that the CIT(A) should have taken the Annual Letting Value at nil or at the Municipal rateable value of Rs. 20,974, instead of Rs. 3,70,249.

The Tribunal restored this matter to the file of the CIT(A) to determine the fair rent in the same manner as laid down in their decision for the assessment year 1998-99. The issue was to be decided afresh in light of enquiries and findings on fair rent as per section 23(1)(a).

3. Allowance of Long-Term Capital Loss:

The assessee sought to carry over a long-term capital loss of Rs. 4,26,340 to subsequent years. The CIT(A) did not allow this, and the Tribunal confirmed the CIT(A)'s decision, noting that the return was filed late, and thus, the capital loss could not be adjusted. This ground was rejected.

Conclusion:

The Tribunal allowed the revenue's grounds for statistical purposes for both assessment years 1997-98 and 1998-99, set aside the CIT(A)'s order, and restored the matter to him for a fresh decision. The assessee's appeal was allowed in part for statistical purposes only, with the issue of the Annual Letting Value for the vacant property being restored to the CIT(A) and the ground regarding the long-term capital loss being rejected.