2010 (11) TMI 477 - AT - Income Tax

Income from House Property - calculation of notional interest on advance rent received and security deposit while determining annual value of the let out property - Since the rent received by the Assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act - Notional interest on interest free security deposit/rent received in advance should not be added to the same whether the revenue authorities are justified in substituting the actual rent received by this Assessee by the rent actually received by M/S. Reclamation Real Estate company India (P) Ltd., from J.P. Morgan Chase Bank, at ₹ 2,87,87,600 as against actual rent received by this Assessee of ₹ 1,12,64,400 - While determining the annual value of the property in the case of A, the AO substituted the rent paid by C to B because the rent paid by B to A was less compared to the rent paid by C to B. The Hon ble Bombay high Court held that annual value is the actual rent received or receivable by the owner from the tenant irrespective whether tenant on such letting has received higher rent - The expression receivable cannot mean anything more than what is actually received - Held that the annual value has to be adopted at the annual rent actually received by the Assessee from ICICI Ltd., viz., ₹ 1,12,64,400 - In the result, appeal by the Assessee is allowed while the appeal by the revenue is dismissed

Issues Involved:
1. Determination of annual value for income from house property.
2. Inclusion of notional interest on advance rent and security deposit in the annual value.
3. Substitution of actual rent received with rent received by an associate company.
4. Levying of interest under sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

1. Determination of Annual Value for Income from House Property
The primary issue revolves around the correct determination of the annual value of a let-out property under Section 23 of the Income Tax Act, 1961. The Assessee contended that the rent received should be considered as the annual value, which was higher than the municipal valuation. The Assessing Officer (AO), however, did not accept this and instead estimated the annual value by adding notional interest on advance rent and security deposits, arriving at a higher annual value.

2. Inclusion of Notional Interest on Advance Rent and Security Deposit in the Annual Value
The AO added notional interest on advance rent received and interest-free security deposits to determine the annual value, arguing that the actual rent was low due to the advance payment and interest-free deposit. The Assessee argued that notional interest should not be included, citing the decision of the Hon'ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd., which held that notional interest on interest-free deposits should not form part of the actual rent under Section 23(1)(b).

The CIT(A) agreed with the Assessee, stating that notional interest cannot be considered for calculating the annual value, supported by the decision of the Hon'ble Bombay High Court and other judicial precedents. The Tribunal upheld this view, emphasizing that the actual rent received should be the annual value under Section 23(1)(b) and notional interest should not be added.

3. Substitution of Actual Rent Received with Rent Received by an Associate Company
In the cases of the Assessee's group companies, the AO substituted the actual rent received with the rent received by an associate company, arguing that properties in the same building should fetch similar rents. The CIT(A) partially upheld this view but substituted the actual rent with a higher rent received by the associate company.

The Tribunal, however, held that the actual rent received by the Assessee should be considered for determining the annual value under Section 23(1)(b), following the decision of the Hon'ble Bombay High Court in Akshay Textiles. The expression "receivable" in Section 23(1)(b) was interpreted to mean what is actually received, not a notional or higher amount.

4. Levying of Interest under Sections 234B and 234D of the Income Tax Act
The Assessee contested the levy of interest under Sections 234B and 234D. However, the judgment does not provide a detailed discussion on this issue, and it appears to have been a secondary concern compared to the primary issues of determining the annual value and inclusion of notional interest.

Conclusion
The Tribunal dismissed the revenue's appeals and allowed the Assessee's appeals, holding that:
- The annual value should be determined based on the actual rent received if it is higher than the municipal valuation.
- Notional interest on advance rent and interest-free security deposits should not be included in the annual value.
- The actual rent received by the Assessee should not be substituted with rent received by an associate company.

The judgment reinforces the principle that the actual rent received should be the determining factor for the annual value under Section 23(1)(b) of the Income Tax Act, without adding notional interest.

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