2014 (8) TMI 356 - HC - Income Tax

Fair rental value u/s 23(1)(a) - Municipal value or actual rent received Applicability of rent control legislation - Whether the Tribunal was right in holding that the fair rental value specified in section 23(1)(a) is the municipal value or actual rent received whichever is higher and not the annual letting value on the basis of comparable instances as adopted by the AO, though the property was not covered by the Rent Control Act Held that - Where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements - Following the decision in Commissioner of Income Tax v. Mani Kumar Subba 2011 (3) TMI 497 - DELHI HIGH COURT - These are usually for fixed periods and renewable - market rate in the locality is an approved method for determining the fair rental value but it is only when the AO is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality - municipal rateable value may not be binding on the AO but that is only in cases of afore-referred nature - It is definitely a safe guide. Even in the cases and matters brought by him to our notice, it is evident that the AO cannot brush aside the rent control legislation is applicable to the premises - the AO has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent - The attempt by the AO to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the Appellate authority - The AO either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999 if the same is applicable or leave the parties to have it determined by the Court or Tribunal under that Act - Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary can be made by the AO. From the three aspects namely of a municipal valuation, of obtaining interest free security deposit and the properties being covered by the Maharashtra Rent Control Act but no standard rent thereunder is fixed. Wherever the AO has not adhered to the those principles, and his finding and conclusion has been interfered with, by the higher Appellate Authorities, the revenue cannot bring the matter as no substantial question of law can be arising for determination and consideration Decided against Revenue.

Issues Involved:
1. Determination of fair rental value under Section 23(1)(a) of the Income Tax Act.
2. Applicability of municipal rateable value versus actual rent received.
3. Inclusion of notional interest on interest-free security deposits in determining annual letting value.
4. Applicability of Rent Control Legislation and its impact on rental value determination.

Issue-wise Detailed Analysis:

1. Determination of Fair Rental Value under Section 23(1)(a) of the Income Tax Act:
The primary issue in these appeals is whether the Tribunal was correct in holding that the fair rental value specified in Section 23(1)(a) should be the municipal value or actual rent received, whichever is higher, and not the annual letting value based on comparable instances as adopted by the Assessing Officer. The court noted that the Assessing Officer has the authority to determine the fair rental value by conducting local inquiries, comparing similar properties, and considering the prevailing market rate. However, this determination must be based on cogent and reliable material, and the municipal rateable value can serve as a safe guide unless there is concrete evidence to suggest otherwise.

2. Applicability of Municipal Rateable Value versus Actual Rent Received:
The court emphasized that the municipal rateable value should not be outrightly rejected as a measure of fair rental value. It can be considered a reliable indicator unless the Assessing Officer has substantial evidence to prove that it does not reflect the market rate. The court agreed with the Full Bench of the Delhi High Court, which held that the annual letting value fixed by municipal authorities could be a rational yardstick, provided it closely aligns with the assessment year in question.

3. Inclusion of Notional Interest on Interest-Free Security Deposits:
The court ruled that notional interest on interest-free security deposits should not be included in determining the annual letting value. The Assessing Officer must base the fair rental value on actual rent received or receivable and not on hypothetical interest that could be earned on security deposits. This view aligns with the judgments of the Calcutta High Court and the Bombay High Court, which have consistently held that notional interest cannot form part of the actual rent under Section 23(1)(b).

4. Applicability of Rent Control Legislation:
The court addressed the issue of properties covered by Rent Control Legislation, noting that the Assessing Officer must consider the standard rent fixed under the applicable rent control laws. If the standard rent has not been determined, the Assessing Officer must either undertake the determination in accordance with the rent control legislation or allow the parties to have it fixed by the appropriate court or tribunal. The Assessing Officer cannot disregard the rent control legislation when it is applicable to the property in question.

Conclusion:
The court concluded that the principles laid down by the Full Bench of the Delhi High Court should govern the determination of fair rental value. The municipal rateable value can be a reliable guide, but it is not binding on the Assessing Officer if there is substantial evidence to suggest it does not reflect the market rate. Notional interest on security deposits should not be included in the annual letting value, and the rent control legislation must be considered when applicable. The court upheld the Tribunal's decisions where the Assessing Officer's findings were not consistent with these principles, dismissing the revenue's appeals.

← Previous Next →