2016 (2) TMI 1248 - AT - Income Tax

Determination of house property income - rental income in respect of vacant period - Property was let out for a period of ten months out of twelve - rent received by the assessee together with the notional interest on the security deposit - HELD THAT - Property was let out for a period of ten months and it remained vacant for a period of two months. No finding by the AO that the rent received by the assessee was less than the fair market value as per the requirement of sec. 23(1)(b) - AO has determined the rental income in respect of vacant period also and the same is against the provisions of section 23(1)(c). Notional interest estimated by the AO on the security deposit received by the assessee, we notice that the AO has not made any enquiry to find out that the rent received by the assessee compels inclusion of the such notional income, which in turn could be determined only if it is shown that the rent received by the assessee together with the notional interest on the security deposit was less than the fair market value determined u/s 23(1)(a). See case of CIT Vs. Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT . In view of the above, we do not find any infirmity in the decision rendered by Ld CIT(A) on this issue. Addition made u/s 41(1) - CIT(A) has given categorical finding that liability of the assessee towards the deposits did not cease. CIT(A) has noticed that one of the parties, viz., ICICI Bank has initiated legal proceedings against the assessee. Hence, we are of the view that the CIT(A) was justified in cancelling the addition made u/s 41(1) of the Act. Determination of the business income - CIT(A) has held that the assessee did not carry on any business and hence the question of setting off of current year as well as brought forward losses of the assessee does not arise. We notice that the said decision of the CIT(A) is in accordance with law. Hence, we do not find any reason to interfere with the order of the CIT(A) on this issue.

Summary

Issues involved:
1. Determination of rental income and Annual Letting Value (ALV).
2. Treatment of interest-free security deposit in rental income calculation.
3. Assessment of deposits under section 41(1) of the Act.
4. Determination of business income and losses.

Analysis:

1. Determination of rental income and Annual Letting Value (ALV):
The appeal and cross-objection were against the order related to the assessment year 2010-11. The AO estimated the ALV at &8377; 82,62,000, including notional interest on interest-free deposits. However, the Tribunal found that the AO did not establish that the rent received was below fair market value as required by the Act. Additionally, the AO calculated rental income for vacant periods, contrary to the Act. The Tribunal cited a relevant case law to support its decision, ultimately upholding the CIT(A)'s direction to accept the assessee's computation of rental income.

2. Treatment of interest-free security deposit:
The AO assessed the interest-free security deposit under rental income, considering it part of ALV. However, the Tribunal noted that the AO failed to investigate if the rent plus notional interest was below fair market value, as required by the Act. Citing a pertinent case law, the Tribunal upheld the CIT(A)'s decision, finding no error in excluding notional interest from rental income calculation.

3. Assessment of deposits under section 41(1) of the Act:
The AO assessed deposits of &8377; 48,50,000 under section 41(1) of the Act, treating them as income due to non-refund. However, the CIT(A) found that the liability towards the deposits remained, as legal actions were initiated against the assessee. The Tribunal agreed with the CIT(A)'s decision, justifying the cancellation of the addition under section 41(1) of the Act.

4. Determination of business income and losses:
The AO determined the business income at NIL, as the assessee did not conduct any other business activity. The CIT(A) upheld this decision, stating that setting off current and brought forward losses did not apply since no business was carried out. The Tribunal found this decision in line with the law and dismissed both the appeal by the revenue and the cross-objection by the assessee.

In conclusion, the Tribunal upheld the CIT(A)'s decisions on all issues, dismissing both the appeal and cross-objection. The judgment was pronounced on 4th Feb, 2016.