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Issues involved: Interpretation of whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling u/s 23(1)(b) of the Income-tax Act, 1961.
Summary: The High Court of Bombay considered the appeal concerning the inclusion of notional interest on an interest-free deposit in the calculation of rent received by the assessee under section 23(1)(b) of the Income-tax Act, 1961. The assessee had let out premises to a lessee who made a security deposit without any interest payable. The Assessing Officer included notional interest in the annual value of the property, which was upheld by the Commissioner of Income-tax (Appeals) but overturned by the Tribunal. The Tribunal held that section 23(1)(b) only applies to actual rent received and not notional interest, thus allowing the appeal. The Department appealed under section 260A of the Income-tax Act, challenging the Tribunal's decision. The Court noted that section 23(1)(b) was invoked by the Department, covering cases where actual rent received exceeds the reasonable rent under section 23(1)(a). The Tribunal found that the actual rent received was already higher than the annual value determinable under section 23(1)(a), and thus section 23(1)(b) applied. The Court referenced previous judgments to explain the distinction between sections 23(1)(a) and 23(1)(b) in determining annual property value based on actual rent received. The Court emphasized that under section 23(1)(b), the actual rent exceeding the fair rent constitutes the annual value of the property. Notional interest, in this case, could not be considered part of the actual rent under section 23(1)(b). The Court clarified that the word "receivable" in section 23(1)(b) refers to actual annual rent payments to the assessee, even if some rent is in arrears. Notional interest was deemed irrelevant to the calculation under section 23(1)(b) and left open the question of its inclusion under section 23(1)(a). Ultimately, the Court dismissed the appeal, upholding the Tribunal's decision that notional interest should not be included in the calculation of actual rent under section 23(1)(b) of the Income-tax Act.
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