2014 (4) TMI 629 - AT - Income Tax

Reasonableness of the sum offered - Addition of notional income on security deposit Computation of house property u/s 23(1)(a) of the Act - Whether the rental income offered by the assessee @ Rs. 11 lakhs per month is reasonable or not Whether the sum of Rs. 1.32 Crs is a reasonable ALV as offered by the assessee or Rs. 1.32 Crs, increased by the notional interest on the reducing balances of the security deposit calculated the notional interest rate of 8% - Held that - The assessee received Rs. 11 lakhs per month as rent and the assessee offered the sum of around Rs. 1.33 Crs as a gross ALV of the assessee, including 1,34,558/- from Hughes Telecom / Tata Teleservices The aspect of reasonableness was not examined by the authorities - The addition made by the AO on account of notional interest applying the rate of 8% on the reducing interest free security deposits is widely on ad-hoc basis and lack of material or evidence to support - There is no information brought on to the record to demonstrate that the rental income for similar property in similar location is higher than what is offered by the assessee in the rental income - applying the rate of 8% without examining the facts and without giving the findings, it is not appropriate to say that that the security deposit has earned interest income from the bank. The assessee s failure to file the basis showing the justification for arriving at the monthly rent of Rs. 11 lakhs for the premises also cannot be appreciated - certain basic things are missing and it is required to remand the matter to the files of the AO - Lower authorities have not provided any discussion on whether the said sum of Rs. 1.32 Crs includes portion attributable to the interest segment on the security deposit - thus, all the three appeals are remitted back to the AO for examining the reasonableness of the computation of the monthly rent of Rs. 11 lakhs per month as offered by the assessee and in what way the same amounts to deflation of rent qua the other premises in the vicinity Decided in favour of Assessee.

Issues Involved:
1. Addition of notional interest on security deposit while computing income from house property under section 23(1)(a) of the Income Tax Act, 1961.
2. Reasonableness of the rental income declared by the assessee.
3. Distinguishing the facts of the case from the precedents cited by the assessee.
4. Double taxation concerns raised by the assessee.
5. Correct computation of notional interest.

Detailed Analysis:

1. Addition of Notional Interest on Security Deposit:
The primary issue in all three appeals, concerning the assessment years 2005-2006, 2006-2007, and 2007-2008, revolves around the addition of notional interest on security deposits while computing the income from house property under section 23(1)(a) of the Income Tax Act, 1961. The assessee contended that the actual rent received should be considered, and notional interest on security deposits should not be added. The assessee relied on various judicial precedents to support this claim, including CIT vs. Satya Company Ltd, CIT vs. Asian Hotels Ltd, and CIT vs. J.K. Investors (Bombay) Ltd. However, the CIT (A) upheld the AO's decision, relying on other tribunal decisions that supported the addition of notional interest.

2. Reasonableness of the Rental Income:
The assessee declared a rental income of Rs. 11 lakhs per month, which was argued to be the fair market rent. The AO added notional interest on the security deposit, considering it an extraneous factor that deflated the rent. The Tribunal noted that the AO's addition was ad-hoc and lacked supporting material or evidence. The Tribunal emphasized the need for a thorough examination of the reasonableness of the declared rent vis-`a-vis similar properties in the vicinity.

3. Distinguishing the Facts from Precedents:
The assessee argued that the facts of their case were different from those in the Moni Kumar Subba case, which the CIT (A) had relied upon. The Tribunal acknowledged the Full Bench decision of the Delhi High Court in Moni Kumar Subba, which clarified that notional interest should not be added to the annual letting value (ALV). The Tribunal highlighted the importance of considering specific facts and circumstances of each case while applying judicial precedents.

4. Double Taxation Concerns:
The assessee raised concerns about double taxation, arguing that the security deposit was invested in its business, and the profits from the business were already taxed. The Tribunal did not specifically address this issue in detail but focused on the reasonableness of the rent and the addition of notional interest.

5. Correct Computation of Notional Interest:
The assessee challenged the computation of notional interest, arguing that it was incorrectly calculated by levying interest on interest. The Tribunal did not delve deeply into the computation specifics but remanded the matter to the AO for a detailed examination of the reasonableness of the rent and the inclusion of notional interest.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, remanding the matter to the AO to examine the reasonableness of the declared rent and the inclusion of notional interest. The AO was directed to consider all relevant factors and provide a reasonable opportunity for the assessee to be heard, ensuring adherence to the principles of natural justice. The Tribunal rejected the ad-hoc addition of notional interest at 8% and emphasized the need for a fact-based determination of the ALV.

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