2011 (11) TMI 127 - HC - Wealth-tax

Computation of fair market value of let out property- interest at 14% on security deposit added to annual rent to compute fair market value of property- Held that - Schedule III, Rule 5 states that where an owner has accepted an amount or deposit, not being an advance payment towards rent for a period of 3 months or less, an amount calculated at the rate of 15% per annum on the amount of deposit outstanding from month to month shall be added to compute the annual rent. Decided in favor of Revenue.

Summary

Issues:
Appeal under Section 27A of the Wealth Tax Act, 1957 for assessment years 1985-86, 1986-87, and 1987-88 regarding the fair market value of a property let out to a tenant.

Analysis:
The respondent-assessee owned a property let out to a tenant for an annual rent of Rs. 4,42,260, with an interest-free security deposit of Rs. 31.50 lakhs. The Assessing Officer referred the matter to the District Valuation Officer to determine the fair market value of the property. The District Valuation Officer added interest on the security deposit to the annual rent, resulting in a fair market value assessment of Rs. 23,37,000. The Commissioner of Wealth Tax (Appeals) later held that interest on the security deposit should not be added to compute the fair market value.

The Income Tax Appellate Tribunal upheld the Commissioner's decision, citing the retrospective nature of Rule 1BB and its replacement by Schedule III to the Act. The Tribunal applied the rent capitalization method for valuation, emphasizing the procedural nature of the rule in determining market value. Rule 5 of Schedule III allowed for the addition of interest on security deposits to compute annual rent, supporting the inclusion of interest in the fair market value calculation.

Referring to relevant legal precedents, the High Court concluded that interest on the security deposit should be added to the annual rent for fair market value computation. The decision favored the Revenue, upholding the Assessing Officer's addition of interest at 14% per annum on the security deposit to determine the annual rent. The appeal was disposed of in favor of the Revenue, with no costs awarded.

In essence, the judgment clarified the application of Rule 1BB, Schedule III, and relevant provisions of the Wealth Tax Act in determining the fair market value of a property let out to a tenant. The decision emphasized the procedural nature of valuation rules and supported the inclusion of interest on security deposits in the annual rent calculation for fair market value assessment.