2014 (4) TMI 549 - AT - Income Tax

Income from house property - Notional interest on interest free deposit Determination of annual value (AV) - Whether the CIT(A) is right in directing the AO to consider the rent of the premises in accordance with the income returned by the assessee instead of fair market rent & ALV arrived at by the AO as per the provision of Section 23(1)(a) of the Act Held that - The rent actually received or receivable for the relevant years could only be reckoned for the purpose of section 23(1)(b) which, therefore, would not include any notional interest (i.e., on the interest-free deposit) - This is in view of the absence of any specific provision in law toward the same in-as-much as the same would require a deeming provision - whatever benefit or addition may have been derived by the assessee from the said interest-free deposit, whether by way of saving on the interest or earning interest or making profit by investing the deposit money, etc. would find reflection in computing the income of the assessee under other heads of income Relying upon CIT vs. J. K. Investors (Bombay) Ltd. 2000 (6) TMI 9 - BOMBAY High Court - the direction by the CIT(A) to the AO is in conformity with the law - the field is clear for the AO and there are no fetters on him - his mandate under law being to assess the fair rent, and for which all the information and material that is relevant could be employed. Claim of proportionate relief on account of vacancy Held that - It is also trite that hardship in a particular case is no reason for not observing the clear mandate of the provision Relying upon Vivek Jain vs. Asst. CIT 2011 (1) TMI 897 - Andhra Pradesh High Court - section 23(1)(c) is an incident of the condition of actual letting thus, the matter is remitted back to the AO for determination of the fair rent, which may or may not exceed the monthly rent. Deduction for municipal taxes Held that - The municipal tax/es paid by the assessee, as disallowed, is for the period relating to the previous years relevant to A.Ys. 2002-03 to 2007-08, i.e., prior to the current year - the order of the CIT(A) is confirmed - The tax levied as contemplated u/s. 23 is only as per law - The deduction qua the tax paid shall stand to be withdrawn (i.e., to the extent of the deduction allowed in its respect) on any part of it being directed to be refunded to the assessee - the amount as finally held as not refundable is which can be said to have been paid by way of tax - Decided against Revenue.

Summary

Issues Involved:
1. Determination of annual value (AV) under the head 'income from house property'.
2. Deduction for municipal taxes paid.

Issue-wise Detailed Analysis:

Issue No. 1 - Determination of Annual Value (AV):

The primary issue pertains to the determination of the annual value (AV) of the property under Section 23 of the Income Tax Act, 1961. The assessee, owning office premises, entered into a leave and license agreement, receiving a monthly rent and an interest-free deposit. The Assessing Officer (A.O.) assessed the gross rent by adding notional interest on the security deposit. The CIT(A) directed the A.O. to determine the fair rent considering all factors, including rent of similarly situated properties, and to allow vacancy allowance for the period when the property remained vacant.

The Tribunal discussed that Section 22 charges tax on the annual value of house property, and Section 23 lays down the computation method. The law, as crystallized in various decisions, indicates that rent received or receivable does not include notional interest on interest-free deposits. However, the hypothetical rent under Section 23(1)(a) should be fair and reasonable, considering factors like location, demand, supply, and rent of similar properties. The Tribunal noted that the interest-free deposit's rent implication should be considered in evaluating the fair rent, but not added per se as done by the A.O.

The Tribunal upheld the CIT(A)'s direction to the A.O. to assess the fair rent without fetters, confirming that the field is clear for the A.O. to employ all relevant information and material. The Tribunal also endorsed the CIT(A)'s direction to allow proportionate relief for vacancy, subject to the fair rent being lower than the contracted rate.

Issue No. 2 - Deduction for Municipal Taxes:

The second issue relates to the deduction for municipal taxes paid. The assessee claimed a deduction for taxes paid for earlier periods, which the A.O. disallowed. The CIT(A) directed the A.O. to allow the deduction for taxes actually paid in the year, irrespective of the previous year in which the liability was incurred, as per the proviso to Section 23.

The Tribunal noted that the law is clear that taxes levied by a local authority shall be deducted in the year they are actually paid. The Tribunal observed that the property might have been used for business purposes during the earlier periods, which could disqualify the tax payment deduction. The Tribunal directed the A.O. to verify if the property was used for business purposes during the relevant periods and to confirm the composition of the demand raised, ensuring only municipal taxes are included.

The Tribunal also noted that the amount paid by the assessee was in protest, and any part of it refunded by the court should lead to the withdrawal of the deduction allowed. The Tribunal confirmed the CIT(A)'s order, subject to these verifications.

Conclusion:

The Tribunal disposed of the Revenue's appeal by confirming the CIT(A)'s directions on both issues, subject to the verifications and considerations discussed. The order was pronounced in the open court on April 09, 2014.