2011 (1) TMI 1492 - AT - Income Tax

Summary

Issues Involved:

1. Whether the CIT(A) erred in directing the AO not to take the notional interest of Rs. 14,04,00,000 on interest-free deposits received by the assessee while computing the Annual Letting Value (ALV) of the property.

Summary:

Issue 1: Notional Interest on Interest-Free Deposits

The Assessing Officer (AO) challenged the CIT(A)'s order dated 18.2.2008 for the assessment year 2005-06, which directed the AO not to consider the notional interest of Rs. 14,04,00,000 on interest-free deposits received by the assessee while computing the ALV of the property. The AO noticed that the assessee had let out commercial premises and received substantial interest-free deposits, which were invested in equity shares of a group company. The AO computed notional interest at 18% per annum on these deposits and included it in the ALV of the property. The CIT(A) deleted this notional interest, following the ITAT's decision on a similar issue.

Upon appeal, the Tribunal found that the issue was covered by the decision dated 15.12.2003 in the assessee's own case for the assessment year 1999-2000, where it was held that revenue authorities cannot consider notional interest on interest-free advances while determining the ALV of rented property. The Tribunal also referred to the case of DCIT v. Reclamation Realty India Pvt. Ltd., where it was observed that the annual value should be based on municipal valuation or actual rent received, not on notional interest.

The Tribunal cited various judicial precedents, including the Supreme Court's rulings in Diwan Daulat Kapoor and Mrs. Sheila Kaushish, which emphasized that the annual value should be the standard rent or municipal valuation, not the actual rent received. The Tribunal also noted that the Bombay High Court in Smitaben N. Ambani held that municipal valuation should be the yardstick for determining the annual value.

The Tribunal concluded that the annual value adopted by municipal authorities should be the determining factor, and notional interest on interest-free security deposits should not be added. Since the CIT(A) followed the Tribunal's earlier decision, the Tribunal approved the CIT(A)'s order and dismissed the revenue's appeal.

Conclusion:

The appeal by the AO was dismissed, and the CIT(A)'s order directing the AO not to consider the notional interest on interest-free deposits while computing the ALV of the property was upheld. The Tribunal emphasized that the annual value should be based on municipal valuation or actual rent received, not on notional interest.