2012 (9) TMI 66 - AT - Income Tax

Mode of computation of ALV of House - dis allowing deduction of interest from house property income as the same interest is taxed under the head income from other sources also - Held that - Assessee was receiving a monthly rent of ₹ 2,20,000/- upto 30.7.1999 & thereafter the assessee received an interest free deposit of ₹ 2.25 crores from the licencee. That assessee s share in the interest free deposit at ₹ 45 lakhs, was deposited in the Savings Bank account with Standard Chartered bank which was simultaneously transferred to the fixed deposit account with Standard Chartered bank on 4th August, 1999. For the period from 1.8.1999 to 31.3.2000, the assessee received interest income of ₹ 2,70,000/- which has been offered for tax under the head income from other sources . Considering these facts the direct nexus has been established by the assessee - the lower authorities have not brought anything on record to establish that the rent & interest free deposit was a sham transaction to circumvent real rent. As decided in Sundeep Exports (P) Ltd. Versus ITO 2011 (2) TMI 316 - ITAT, Mumbai ALV adopted by Municipal rateable value should be the determining factor for applying provisions of Sec. 23(1)(a) - Thus the ALV adopted by the municipal authorities should be taken into consideration and the matter is restored back to the file of the AO to verify the Municipal rateable value of the property and if the actual rent received by the assessee is more than the municipal rateable value, then to adopt the actual rent of the ALV of the property. Disallow deduction on interest from house property income - Held that - As the same interest has been taxed under the head income from other sources also there is a direct nexus of interest received on Fixed deposit vis- -vis the security deposit, therefore the same interest cannot be considered for computing house property income more so we have also held that ALV has to be determined as per the municipal rateable value or actual rent whichever is higher. Determination of the annual let out value of 7 flates at Sunbeam building - Held that - Municipal rateable value shall be taken into consideration for determining the ALV comparing it with the actual rent whichever is higher shall be taken it as income under the head income from house property. Applying the same principle, the matter is restored back to the file of the AO directing the AO to verify the municipal rateable value of 7 flats - appeal in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Assessment of income from a flat at NCPA.
2. Adoption of Municipal ratable value for NCPA flat.
3. Deduction of interest from house property income.
4. Assessment of income from seven flats at Sunbeam building.

Issue-wise Detailed Analysis:

1. Assessment of Income from NCPA Flat:
The assessee challenged the Assessing Officer's (AO) decision to assess the income from the NCPA flat at Rs. 4,81,005/- instead of the Rs. 1,68,329/- declared in the return. The AO noted that the flat was let out at a significantly lower rent after receiving a substantial interest-free deposit, which led to the conclusion that part of the rent was structured into the deposit. The AO compared the rent with a similar flat in the same building and assessed the income accordingly. The Tribunal found that the assessee had established a direct nexus between the deposit and the interest income and held that the actual rent received should be considered if it exceeds the Municipal ratable value.

2. Adoption of Municipal Ratable Value for NCPA Flat:
The assessee argued that the Annual Letting Value (ALV) should not exceed the Municipal ratable value. The Tribunal, referencing the Bombay High Court's decision in Smt. Smitaben N. Ambani Vs CIT, agreed that the Municipal ratable value should be considered as the fair rent. The Tribunal directed the AO to verify the Municipal ratable value and adopt the actual rent received if it is higher than the Municipal ratable value.

3. Deduction of Interest from House Property Income:
The assessee sought a deduction of Rs. 2,70,000/- as interest from house property income, which was also taxed under the head "income from other sources." The Tribunal found a direct nexus between the interest received on the fixed deposit and the security deposit. Consequently, the interest should not be considered for computing house property income. The Tribunal directed that the ALV should be determined based on the Municipal ratable value or actual rent, whichever is higher.

4. Assessment of Income from Seven Flats at Sunbeam Building:
The AO assessed the income from seven flats at Sunbeam building at Rs. 2,97,750/- against the Rs. 1,81,500/- declared by the assessee. The Tribunal applied the same principle as with the NCPA flat, directing the AO to verify the Municipal ratable value and adopt the actual rent if it is higher than the Municipal ratable value.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO to verify the Municipal ratable values and adopt the higher of the actual rent received or the Municipal ratable value for computing income from house property. The deduction for interest was allowed based on the established nexus between the deposit and the interest income. The same principles were applied to the assessment years 2001-02 and 2002-03.