2012 (5) TMI 159 - AT - Income Tax

Income from house property - addition of ₹ 24,30,000/- on account of notional interest on interest free deposits and advance rent - Circular No. 204 dated 24.07.1976 - Held that it is clear that if the Municipal valuation of the property is more than the rent received or receivable then the same should be taken for the purpose of valuation. However, if the rent received or receivable is more than the municipal value then the actual rent received or receivable will be taken as annual letting value of the property within the meaning of section 23(1) - ITAT Mumbai Bench in the case of Reclamation Realty India (P.) Ltd. (2010 (11) TMI 477 - ITAT, MUMBAI) - Decided in favor of the assessee

Summary

Issues Involved:
1. Deletion of addition of Rs. 24,30,000/- on account of notional interest on interest-free deposits and advance rent received by the assessee.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 24,30,000/- on Account of Notional Interest:

The department filed an appeal against the CIT(A)'s order, which deleted the addition of Rs. 24,30,000/- made by the Assessing Officer (AO) on account of notional interest on interest-free deposits and advance rent received by the assessee. The AO had added this notional interest to the actual rent received while determining the annual ratable value of the let-out properties under the head "Income from house property."

During the assessment proceedings, the AO noted that the appellant had received significant deposits from tenants and required the appellant to show cause why notional interest on these deposits should not be added to the rent amount received. The appellant argued that the actual rent/license fee received far exceeded the Municipal ratable value of the premises and should be taken as the "annual value" under section 23(1). The AO, however, rejected this contention and added notional interest at 10% on such deposits to the actual rent received, resulting in an addition of Rs. 24,30,000/-.

Before the CIT(A), the assessee reiterated that the actual rent received far exceeded the municipal ratable value and should be computed as the annual letting value under section 23(1)(b). The appellant heavily relied on the judgment of the Hon'ble Bombay High Court in the case of CIT v. J.K. Investors (Bombay) Ltd. and other relevant judgments. The CIT(A), after considering various judgments, deleted the notional interest on deposits from the annual letting value and held that the actual rent received should be taken as ALV under section 23(1)(b).

The Tribunal considered the provisions of section 23, which provides for the determination of the annual value of the property. It noted that prior to 01.04.1976, the determination was based on the sum for which the property might reasonably be expected to let from year to year, without considering the actual rent received. Post the amendment, section 23(1)(b) was introduced to consider the actual rent received if it exceeded the fair rent.

The Tribunal referred to CBDT Circular No. 204, which clarified that if the rent received or receivable is more than the municipal value, the actual rent should be taken as the annual letting value of the property. The Tribunal also relied on the judgment of the Hon'ble Bombay High Court in J.K. Investors (Bombay) Ltd., which held that notional interest cannot form part of the actual rent under section 23(1)(b) if the actual rent received is more than the fair rent.

The Tribunal distinguished the decision of the Third Member in the case of ITO v. Baker Technical Services (P) Ltd., where the facts involved a substantial reduction in rent after accepting a huge deposit. In this case, the actual rent received by the appellant was far more than the municipal ratable value, and thus, notional interest could not be added to the annual rent received.

The Tribunal concluded that the annual value should be determined based on the actual rent received, as it was more than the municipal ratable value. The notional interest on interest-free security deposits should not be added, following the decision of the Hon'ble Bombay High Court in J.K. Investors (Bombay) Ltd. Consequently, the Tribunal confirmed the order of the CIT(A) deleting the notional interest of Rs. 24,30,000/- added by the AO.

Conclusion:

The appeal filed by the department was dismissed, and the order of the CIT(A) deleting the addition of Rs. 24,30,000/- on account of notional interest was upheld. The Tribunal emphasized the precedence of actual rent received over notional interest for determining the annual value under section 23(1)(b).