2011 (3) TMI 504 - AT - Income Tax

Income from House property - Annual Value and Fair Value - Interest accrued on advance security deposit as notional rent - held that - That in this case the ALV cannot be limited to the standard rent as workable under the Rent Control Act but the fair rental value shall have to be determined. The fair rental value determined by the Assessing Officer however is not reasonable. - matter remanded back to AO for determination of the fair rent to be adopted as the annual letting value.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition made on account of interest accrued on advance security deposit as notional rent.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Notional Interest:
The primary issue in this case revolves around whether the CIT(A) was justified in deleting the addition made by the Assessing Officer (AO) on account of notional interest on interest-free deposits received by the assessee.

Background Facts:
The assessee declared rental income of Rs. 8,55,960 and had received interest-free deposits amounting to Rs. 1,64,40,000. The AO believed that the interest-free deposits were accepted to understate rental income and avoid tax. Consequently, the AO added notional interest at 6% on the deposits, amounting to Rs. 9,84,000, to the income under the head "income from house property."

CIT(A) Decision:
The CIT(A) deleted the addition made by the AO, relying on the decision of the Mumbai Tribunal in J.K. Investors (Bombay) Ltd. v. Dy. CIT [2000] 74 ITD 274.

Revenue's Argument:
The Departmental Representative argued that the Hon'ble Jurisdictional High Court in CIT v. J.K. Investors (Bombay) Ltd. [2001] 248 ITR 723/[2000] 112 Taxman 107 (Bom.) had left open the issue of addition on account of notional interest while determining the fair rent under section 23(1)(a) of the Income-tax Act, 1961. Therefore, the CIT(A) had wrongly applied the decision in favor of the assessee.

Assessee's Argument:
The Counsel for the assessee contended that no addition could be made for determining the annual letting value under section 23(1) of the Act when the actual rent received was more than the municipal value or standard rent. The Counsel cited several case laws, including Delite Enterprises (P.) Ltd. v. ITO [2008] 22 SOT 245 (Mum.), Midland International Ltd. v. Dy. CIT [2007] 109 ITD 198/13 SOT 149 (Delhi), and J.K. Investors (Bombay) Ltd. (supra).

Tribunal's Observations:
The Tribunal noted that the AO did not determine the fair rent of the property as per section 23(1)(a) of the Act and instead made the addition based on notional interest. The Tribunal emphasized that for computing annual letting value, the AO must first determine the fair rent by considering various factors, including standard rent and municipal value. The Tribunal referenced the Hon'ble Jurisdictional High Court's decision in J.K. Investors (Bombay) Ltd., which clarified that notional interest could not form part of the actual rent received under section 23(1)(b) but left open the issue of notional rent under section 23(1)(a).

Conclusion:
The Tribunal concluded that the CIT(A) had not adjudicated the issue properly as the AO did not perform the requisite exercise of determining the fair rent. Consequently, the Tribunal set aside the CIT(A)'s order and restored the issue to the AO for de novo adjudication, emphasizing that the AO must determine the fair rent in accordance with section 23(1)(a) and compare it with the actual rent received.

Final Order:
The appeals filed by the revenue were allowed for statistical purposes, and the matter was remanded back to the AO for fresh consideration.

Summary of Judgments Delivered:
- The Tribunal set aside the orders of the CIT(A) for all assessment years and remanded the issue back to the AO for fresh adjudication.
- The Tribunal emphasized the need for the AO to determine the fair rent as per section 23(1)(a) and compare it with the actual rent received, noting that notional interest could not form part of the actual rent under section 23(1)(b).

Conclusion:
The Tribunal's decision underscores the importance of following statutory provisions for determining fair rent and highlights that notional interest cannot be added to the actual rent received under section 23(1)(b) of the Income-tax Act. The matter was remanded to the AO for a fresh determination of the fair rent in accordance with the law.