2011 (3) TMI 1035 - AT - Income Tax

Revision u/s 263 - AO had not made addition on account of notional interest on the interest free deposits obtained by the appellant under section 23(1)(a) - CIT directed AO to levy penalty under section 271(1)(c) in his order of revision under section 263 - Held that - As per the provisions of section 23(1), the ALV has to be determined by taking into account the sum for which the property might reasonably be expected to let from year to year under section 23(1)(a) and then if the property is let out then the AO has to first take into account the actual rent received or reasonably by the owner of the property. Thus, as per the provisions of section 23(1), AO has to first determine the fair rent under section 23(1)(a) and then take into account the actual rent received or receivable by the assessee under section 23(1)(b) only thereafter the AO has to compare the fair rent under section 23(1)(a) with the actual rent received or receivable as per the section 23(1)(b). If the Assessing Officer found that the actual rent is excess of the sum as determined under section 23(1)(a) then the ALV of the property would be actual rent. Since, in the case in hand, AO has not at all shown any exercise for computation of the ALV of the property by adopting the method as provided under section 23(1). The exercise of determination of the ALV as per the section 23(1) includes two steps, first determination of fair rent under section 23(1)(a) and second actual rent received or receivable by the owner. For computation of the sum for which the property might reasonably be expected to let, the AO has to take into account various factors. As it is settled by the various decisions by the Hon ble Supreme Courts and High Courts that fair rent under section 23(1)(a) may be determined by considering the Municipal Value or standard rent of the property as the case may be. Therefore, on merits requires to be verified and examined properly by taking into account various factors requires for determination of the ALV as prescribed under section 23(1) of the Act. The CIT while passing the revision order u/s 263 has not taken into account all the aspects for computation of the ALV as prescribed under section 23(1). Since the Municipal value/standard rent of the property in question is not available on the record, therefore, the issue on merits cannot be adjudicated. Accordingly set aside the issue to the record of the AO for verification, examination and adjudication on the issue of ALV as per law. The revision order passed by the CIT under section 263 is modified - appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:
1. Jurisdiction of CIT under section 263.
2. Addition on account of notional interest on interest-free deposits under section 23(1)(a).
3. Validity of CIT's direction to recompute income by adding notional interest.
4. CIT's direction to levy penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT under Section 263:
The primary contention was whether the CIT had the jurisdiction to revise the assessment under section 263. The assessee argued that the CIT substituted his opinion for that of the Assessing Officer (AO), who had already examined the issue of annual letting value (ALV). The CIT cannot take a different view once the AO has taken a view. The AO had raised queries about the interest-free deposits and received explanations, including a copy of the agreement with the bank. The assessee relied on decisions from the Bombay and Calcutta High Courts to support their argument.

The Tribunal found that the AO had not applied his mind or taken any view on the issue of notional interest for determining the Fair Market Rent under section 23(1)(a). The AO's queries were about the sources of liabilities shown as security deposits, not for computing the fair rent. Therefore, the CIT did not substitute his view but addressed an issue the AO had overlooked. The Tribunal cited the decision in Arvee International v. Addl. CIT, emphasizing that an order is erroneous if it is based on incorrect assumptions, incorrect application of law, or non-application of mind. Thus, the CIT's exercise of jurisdiction under section 263 was justified.

2. Addition on Account of Notional Interest on Interest-Free Deposits under Section 23(1)(a):
The assessee contended that notional interest should not be added while determining the ALV under section 23(1)(a), supported by various judicial decisions. The Tribunal noted that as per section 23(1), the AO must first determine the fair rent under section 23(1)(a) and then consider the actual rent received or receivable under section 23(1)(b). The AO failed to follow this process, not showing any exercise for computing the ALV by the prescribed method. The Tribunal highlighted that determining the fair rent involves considering factors like Municipal Value or standard rent, which were not available in the record. Hence, the issue on merits required proper verification and examination by the AO.

3. Validity of CIT's Direction to Recompute Income by Adding Notional Interest:
The Tribunal observed that the CIT's revision order under section 263 did not consider all aspects for computing the ALV as prescribed under section 23(1). Since the Municipal value/standard rent of the property was not on record, the Tribunal set aside the issue to the AO for verification, examination, and adjudication on the ALV issue as per law. Thus, the CIT's direction to recompute income was modified.

4. CIT's Direction to Levy Penalty under Section 271(1)(c):
The Tribunal did not specifically address this issue in detail, as the primary focus was on the jurisdiction under section 263 and the addition of notional interest. However, by setting aside the issue to the AO for proper examination, the Tribunal implicitly indicated that any penalty considerations would depend on the outcome of the reassessment.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT's jurisdiction under section 263 but modifying the direction to recompute income by setting aside the issue to the AO for proper verification and examination. The Tribunal emphasized the need for the AO to follow the prescribed method for determining the ALV under section 23(1).

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