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TMI Blog2010 (10) TMI 742X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing substantial questions of law : "(i) That on the facts and in the circumstances of the case, the hon'ble Income-tax Appellate Tribunal has erred in law in restricting the annual letting value of the property comprising land, building, machinery, etc., at Rs. 1.50 lakhs as against Rs. 7.80 lakhs adopted by the Assessing Officer, ignoring that security of Rs. 35 lakhs was received from the tenant on which no interest was paid. (ii) That on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal has erred in law in observing that the Revenue has not made any effort to show that the standard rent determinable under the Rent Act is more than the actual rent received by the assessee even when the property in question does not fall within the ambit of the Rent Control Act as the leased out asset includes plant and machinery as well." 4. In brief, the facts necessary for adjudication as narrated in the appeal are that the assessee had been earning rental income by letting out the facilities of factory, land, building and offices, etc. It was noticed by the Assessing Officer that the assessee had taken interest-free security of Rs. 35 lakhs fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the apex court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 to urge that the present case relating to the security deposit of Rs. 35,00,000 is one which stands fully covered by the observations relating to the avoidance of tax made by the apex court. Alternatively, learned counsel submitted that in case the notional interest on interest-free security deposit is not brought to tax under the heading "Income from house property" the same cannot escape taxability under section 56 of the Act being "Income from other sources". 9. Refuting the arguments of the Revenue, learned counsel for the assessee, besides supporting the order of the Tribunal submitted that the Tribunal had rightly dismissed the appeal of the Revenue. Elaborating his argument, learned counsel submitted that the assessee did not adopt any dubious mechanism to avoid payment of legitimate tax liability and the security deposit was, in fact, a transaction to secure the interest of the assessee. 10. The point for consideration in this appeal is, whether in the facts and circumstances the interest that may accrue on the security deposit of Rs.35,00,000, which was received by the assessee from the tenants, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. ESS BEE Stampings." 14. The relevant terms of lease agreement with ESS BEE Stampings stipulated as under : "The agreement of lease is dated August 21, 1986 as per column 1, hereby agrees to give on lease and M/s. ESS BEE hereby agrees to take on lease built up area measuring approximately 11000 sq. ft. shaded in red in the plan attached hereto as schedule B complete with fixtures, electrical installations, water supply arrangements and the plant, equipment, machines, jigs, fixtures, dyes, tools listed in schedule A attached herewith on terms and conditions hereinafter contained." As per schedule B : Schedule B Lease rent of Rs. 12,500 per month payable as under : (Rs.) (a) Lease rent of fixture, plant and machinery dyes, etc. : 8,000 (b) Usages of land and shed area 4,500 Total 12,500 In its return of income the assessee is showing income from lease rent of fixture, plant and machinery, dyes, etc., as business income and lease rent of usage of land and shed area as income from house property. 15. The clause with regard to interest-free security in both the agreements reads thus : "2.2 Interest free security : Lessee has given the security amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." 17. Thus, issue No. 1 stands answered against the assessee and it is concluded that the security deposit was a sham device to avoid tax and had no real basis with the actual rent that was received by the assessee. 18. Taking up the second issue, it may be noticed that section 22 of the Act deals with income from house property and states that the annual value of property of the description specified therein shall be chargeable under the head "Income from house property". Section 23 of the Act provides the manner in which the annual value of any property is to be determined for the purposes of computing the income from house property. Thus, section 23 provides the formula for ascertaining the annual value of property. 19. Section 23(1) as originally enacted was couched in the following terms : "23. Annual value how determined.-(1) For the purposes of section 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year : Provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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