2016 (12) TMI 455 - AT - Income Tax

Computation of annual value of the property let out to the assessee s sister concern - AO observed that in the interim period of one year no payment of rent appears to have actually made to the assessee by the lessee - Held that - Undisputedly the property in question was let out to its sister concern vide lease deed dated 1.4.2006 for a monthly rent of ₹ 5 lakhs. At that time, no interest free security deposit was given or credited to the assessee s account. By supplementary lease deed dated 29.3.2007, the terms of the lease were modified and monthly rent was reduced to ₹ 25,000 per month from ₹ 5 lakhs per month. At that time, interest-free security deposit was also negotiated and as per the revised terms of lease deed, the lessee would pay the appellant an interest-free security deposit of ₹ 25 crores. Meaning thereby that on receipt of substantial amount of ₹ 25 crores, monthly rent was reduced from ₹ 5 lakhs to ₹ 25,000 per month. Therefore, the notional rent earned on this ₹ 25 crores cannot be ignored at the time of computing the ALV of the property. Punjab & Haryana High Court in the case of CIT v. K. Streetlite Electric Corporation, (2010 (10) TMI 742 - Punjab and Haryana High Court ) categorically held that interest-free security deposit taken by the assessee hugely disproportionate to monthly rent charged is a device to circumvent liability to income-tax. Therefore, notional interest on security deposit is to be treated as income from house property. Therefore the AO has rightly adopted the ALV which was even lesser to the monthly rent of ₹ 5 lakhs per month initially agreed upon by the parties. Thus, we find no infirmity in the order of CIT(Appeals) and we confirm the same. - Decided against assessee

Summary

Issues Involved:
1. Computation of Annual Letting Value (ALV) of the property.
2. Justification of rent reduction from ?5 lakhs to ?25,000 per month.
3. Consideration of interest-free security deposit in ALV computation.
4. Applicability of interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Computation of Annual Letting Value (ALV) of the Property:
The primary issue in these appeals relates to the computation of the ALV of the property let out to the assessee's sister concern, M/s. Sobha Developers Ltd. Initially, the property was let out at a market rent of ?5 lakhs per month, which was later reduced to ?25,000 per month through a supplementary lease deed. The Assessing Officer (AO) did not accept the reduced rent and assessed the ALV at ?52,16,768 by estimating the market value at ?7 per sq.ft. based on local inquiries.

2. Justification of Rent Reduction:
The assessee argued that the rent reduction was due to financial assistance received from Sobha Developers Pvt. Ltd. in the form of interest-free trade advances, which were converted into an interest-free security deposit of ?25 crores. The CIT(Appeals) examined the legal position and the implications of business expediency and concluded that the AO rightly worked out the ALV based on the initial lease deed fixing the rent at ?5 lakhs per month. The CIT(A) found several discrepancies in the assessee's claims and noted that the reduction in rent lacked credibility and appeared to be a manipulative transaction aimed at tax avoidance.

3. Consideration of Interest-Free Security Deposit:
The Tribunal upheld the view that the interest-free security deposit of ?25 crores received by the assessee could not be ignored while computing the ALV. The Tribunal referred to the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. K. Streetlite Electric Corporation, which held that interest-free security deposits disproportionate to the monthly rent charged are a device to circumvent tax liability. Therefore, notional interest on the security deposit should be treated as income from house property.

4. Applicability of Interest under Sections 234B and 234C:
The Tribunal found that the interest under sections 234B and 234C is consequential in nature and does not require independent adjudication. Therefore, the appeals on this ground were dismissed.

Conclusion:
The Tribunal dismissed the appeals, confirming the AO's computation of the ALV by taking into account the interest-free security deposit and rejecting the reduced rent claimed by the assessee. The Tribunal also upheld the consequential applicability of interest under sections 234B and 234C of the Income Tax Act.