2012 (12) TMI 371 - AT - Income Tax

Computation of income - Income from house property - Inclusion of notional interest in the municipal ratable value - calculation of notional interest on advance rent received and security deposit(used for renovation) while determining annual value of the let out property - The rent payable as per the lease agreement from the said tenants was Rupee 1/- per sq.ft. per month. The total rent of Rs. 2,54,400 thus was received for the year under consideration from the tenants in respect of Jindal Mansion and since the municipal ratable value of the said building at Rs. 10,61,190 was higher than the actual rent received, income under the head Income from house property was declared by the assessee in is return of income by adopting the municipal ratable value. According to the AO, interest on security deposits taken by the assessee from the tenants was liable to be added on notional basis to the actual rent received by the assessee in order to determine the annual letting value of the building owned by the assessee. Held that - following the decision of court in case of Dy. CIT Versus Reclamation Realty India Pvt. Ltd 2010 (11) TMI 477 - ITAT, MUMBAI AO directed to accept the income from house property declared by the assessee adopting the municipal ratable value as annual letting value of its property. - in favor of assessee.

Issues involved:
Computation of income chargeable to tax under the head "Income from house property" based on actual rent received and security deposits, judicial interpretation of fair rent determination under section 23(1)(a) of the Income Tax Act, comparison of actual rent received with fair market rent, relevance of security deposits in determining annual letting value, applicability of legislative amendments to rent valuation, consideration of annual value in relation to municipal ratable value, interpretation of annual value for property tax purposes, judicial precedents on determining annual value for income tax assessment.

Issue 1: Computation of income from house property
The main issue in the appeals was the computation of income chargeable to tax under the head "Income from house property." The Assessing Officer (AO) determined the income at Rs. 9,84,58,080/- by adding notional interest on security deposits to the actual rent received. The assessee contended that notional interest should not be considered, and the municipal ratable value should be accepted as the annual letting value. The CIT(A) partially accepted the assessee's contention but determined the annual letting value based on the rent fetched by similar properties in the vicinity. The Tribunal reviewed the arguments and relied on judicial precedents to conclude that the income declared by the assessee adopting the municipal ratable value should be accepted. The Tribunal modified the CIT(A)'s order and directed the AO to accept the income based on the municipal ratable value.

Issue 2: Interpretation of fair rent determination
The Tribunal considered the interpretation of fair rent determination under section 23(1)(a) of the Income Tax Act. The Revenue relied on a decision of the Delhi High Court emphasizing the need to determine the fair market rent based on what the property might reasonably be expected to fetch. The assessee referred to a Tribunal decision and legislative amendments to argue that actual rent received should represent the annual value unless it exceeds the sum for which the property might reasonably be expected to let. The Tribunal analyzed various judicial precedents, including decisions of the Supreme Court and High Courts, to support its conclusion that the annual value should be determined based on the municipal ratable value in this case.

Issue 3: Comparison with property tax valuation
The Tribunal also compared the concept of annual value for income tax assessment with property tax valuation principles. It referred to a Supreme Court decision highlighting that the annual value is the rent realizable by the landlord and cannot exceed the standard rent. The Tribunal considered decisions of the Calcutta and Bombay High Courts, which equated municipal valuation with the annual value for income tax purposes. By analyzing these precedents, the Tribunal concluded that the municipal ratable value should be considered as the annual letting value for determining income from house property.

Conclusion:
The Tribunal allowed the appeal of the assessee regarding the computation of income from house property, directing the AO to accept the income based on the municipal ratable value. The decision was supported by judicial precedents emphasizing the relevance of municipal valuation in determining the annual letting value. The Tribunal's analysis focused on interpreting fair rent determination under the Income Tax Act and aligning it with property tax valuation principles established by various court decisions.

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