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2014 (3) TMI 956 - AT - Income TaxRevision u/s 263 - De novo assessment - assessment of rental income from business centre received by the assessee from HDFC Bank Ltd. - AO failed to make the necessary enquiries for calculating the fair market rental value of the property in question - Held that - AO instead of making enquiries as per the directions given by the ld. Commissioner vide his order passed under section 263, by relying upon the decision of the co-ordinate bench of the Tribunal in the case of Trivoly Investment & Trading Co. (P.) Ltd. (2003 (6) TMI 463 - ITAT MUMBAI) assessed the income taking into account the reasonable interest on the security deposits being usu-fructuous of the property. In our view, the approach adopted by the AO in the de novo assessment was not proper. It can be said to be a case where the AO did not properly comply with the directions while making de novo assessment. It may be observed that while making de novo assessment, though the AO was required to make necessary enquiries as directed by the ld. Commissioner vide his order under section 263 but, at the same time the AO was also at liberty to take into consideration the other facts and circumstances and the case law, if any, available before him. So taking into consideration the overall facts and circumstances, in our view, it will be fit if the matter is restored to the file of the AO for de novo assessment - Decided in favour of assessee for statistical purposes.
Issues:
Assessment of rental income from business center received by the assessee from HDFC Bank Ltd. Analysis: The appeal was filed by the assessee against the order of the CIT(A) regarding the assessment of rental income from a business center received from HDFC Bank Ltd. The Administrative Commissioner directed the AO to conduct a de novo assessment as the rent offered was deemed inadequate, and the interest-free deposit of Rs. 7 crores was not considered. The AO, in the de novo assessment, found the rent to be low compared to market rates and concluded that the deposit was to compensate for the low rent. The AO calculated the fair market rent as per section 23(1)(a) of the Act, considering the interest on the deposit. The Commissioner partially upheld the AO's decision but noted that the AO exceeded jurisdiction in enhancing the annual value of other properties. The assessee contended that the AO did not follow the directions under section 263. The AO's reliance on the Trivoly case was challenged by the assessee. The AO's failure to examine the cost of assets leased, adequacy of rent, and the purpose of the deposit was noted. The AO relied on the Trivoly case to calculate notional rent based on the deposit amount. The Delhi High Court's Moni Kumar Subba case highlighted the need to determine fair rent based on various factors, not just municipal valuation. The AO's approach was deemed improper as he did not follow the Commissioner's directions. The AO should have conducted necessary inquiries to determine fair rental value. The AO's actions were distinguished from a previous case where the AO outright refused to make inquiries. The matter was remanded to the AO for a proper de novo assessment considering all relevant factors and case law. The conclusion drawn from the decisions highlighted that notional interest on security deposits may not form part of income unless the deposit is to circumvent actual rent. The AO should have followed the Commissioner's directions for determining fair rent. The case was restored to the AO for a fresh assessment in line with the law and directions given, allowing the assessee's appeal for statistical purposes.
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