2006 (9) TMI 207 - AT - Income Tax

Determination of annual letting value (ALV) u/s 23(1)(a) - let out property - reasonable/fair rent - Income From House Property - Disallowance of interest payment - HELD THAT - On Persual of Provisions leads us to the conclusions that -(i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances (ii) an inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness (iii) actual rent received in normal circumstances would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration (iv) such ALV however cannot exceed the standard rent as per the Rent Control Legislation applicable to the property (v) if standard rent has not been fixed by the Rent Controller then it is the duty of the Assessing Officer to determine the standard rent as per the provisions of rent control enactment (vi) the standard rent is the upper limit if the fair rent is less than the standard rent then it is the fair rent which shall be taken as ALV and not the standard rent. Thus in our opinion the Assessing Officer can take into consideration any circumstance which may inflate/deflate the fair rent u/s 23(1)(a) of the Act. If such rent is less than the standard rent then the same shall be taken as fair rent otherwise the standard rent shall be considered as fair rent u/s 23(1)(a) of the Act. Once the fair rent is so determined then the applicability of section 23(1)(b) would have to be considered. If the actual rent received/receivable is higher than the fair rent then the actual rent would be treated as ALV otherwise the fair rent so determined shall be taken as ALV. In our opinion the fair rent would be determined in accordance with guidelines provided by us in this order and the same would be considered as the reasonable rent u/s 23(1)(a). If actual rent is more than the fair rent then actual rent would be considered as ALV otherwise the fair rent so determined shall be treated as ALV. The learned CIT(A) has simply held that notional interest on interest-free deposit cannot be added to the actual rent received. The Assessing Officer had added the notional interest on deposit on the ground that such interest partakes the character of rent. It shows that the Assessing Officer had proceeded to determine the ALV u/s 23(1)(b) of the Act. Neither the Assessing Officer nor the learned CIT(A) proceeded to determine the fair rent as per the provisions of section 23(1)(a). Thus we are of the view that the entire matter requires fresh adjudication in accordance with the legal position discussed by us. Accordingly the orders of the learned CIT (Appeals) are therefore set aside on this issue and consequently the matter is restored to the file of Assessing Officer for fresh adjudication in accordance with the legal position mentioned by us. A reasonable opportunity of being heard shall be given to the assessee who shall also be at liberty to furnish any material/evidence in support of its claim. Claimed deduction in the computation of income from house property - Disallowance of interest payment - loan for repayment of the original loan - HELD THAT - It is not the case of Assessing Officer that the second loan was borrowed for repayment of the original loan. There is nothing in the circular to suggest that initial loan must be interest bearing loan. Therefore we are unable to uphold the order of the Learned CIT (Appeals). The order of the Learned CIT (Appeals) is therefore set aside and consequently the Assessing Officer is directed to allow the deduction in computing the income under the head Income from house property . In the result Revenue s appeals stand allowed for statistical purposes while the assessee s appeal stands partly allowed.

Summary

Issues Involved:
1. Determination of Annual Letting Value (ALV) under section 23(1)(a) of the Income-tax Act, 1961.
2. Consideration of notional interest on interest-free deposits in determining ALV.
3. Applicability of standard rent and municipal value in determining ALV.
4. Deduction of interest on loans for computing income from house property.

Issue-wise Detailed Analysis:

1. Determination of Annual Letting Value (ALV) under section 23(1)(a) of the Income-tax Act, 1961:

The primary issue in these appeals is the determination of ALV under section 23(1)(a) of the Income-tax Act, 1961. The assessee owned a flat let out to Swiss Bank Corporation with a monthly rent of Rs. 50,000 and an interest-free deposit of Rs. 3.75 crores. The Assessing Officer (AO) determined the ALV at Rs. 51,00,000, including notional interest on the deposit, while the assessee declared it at Rs. 6,00,000. The CIT (Appeals) held that the AO's action was erroneous, stating that there is no provision under the Act for considering notional interest on interest-free deposits in determining ALV. The CIT (Appeals) directed the AO to re-compute the income from house property without including notional interest.

2. Consideration of Notional Interest on Interest-Free Deposits in Determining ALV:

The AO included notional interest on the interest-free deposit as part of the rent, determining the ALV at Rs. 51,00,000. The CIT (Appeals) rejected this approach, citing the decision 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 received under section 23(1)(b). The Tribunal agreed with this view, stating that the AO's approach of including notional interest was contrary to binding judgments and unsupported by case law.

3. Applicability of Standard Rent and Municipal Value in Determining ALV:

The CIT (Appeals) and the Tribunal emphasized that ALV under section 23(1)(a) cannot exceed the standard rent where the property is subject to Rent Control Legislation. The Tribunal cited various Supreme Court judgments, including Mrs. Shiela Kaushish and Dewan Daulat Rai Kapoor, which held that ALV cannot exceed the standard rent. The Tribunal also noted that the municipal ratable value, if correctly determined, can be taken as ALV under section 23(1)(a). However, the AO is not bound by the municipal valuation if it does not represent the correct fair rent.

4. Deduction of Interest on Loans for Computing Income from House Property:

The assessee claimed a deduction of Rs. 24.68 lakhs for interest paid on a loan taken from Citi Bank to repay an interest-free loan used to acquire the flat. The AO and CIT (Appeals) disallowed the deduction, arguing that the original loan was interest-free. The Tribunal, however, allowed the deduction, citing Board Circular No. 28, which permits the deduction of interest on a second loan used to repay the original loan, regardless of whether the original loan was interest-bearing.

Conclusion:

The Tribunal set aside the orders of the lower authorities, directing the AO to re-determine the ALV under section 23(1)(a) without including notional interest and to consider the standard rent and municipal value. The Tribunal also allowed the deduction of interest on the second loan for computing income from house property. The appeals were allowed for statistical purposes, and the assessee's appeal was partly allowed.