2011-VIL-919--DT

Income Tax Appellate Tribunal, MUMBAI

IT APPEAL NOS. 1862 TO 1864 (MUM.) OF 2008

Date: 25.03.2011

INCOME-TAX OFFICER, WARD 24(3)(1), MUMBAI

Vs

HANSA MOTOR WORKS

R.S. Srivastav for the Appellant.
Ms. Sanjukta Chowdhury for the Respondent.

BENCH

RAJENDRA SINGH, VIJAY PAL RAO, JJ.

JUDGMENT

Vijay Pal Rao, Judicial Member. –

These appeals filed by the revenue, are directed against the impugned orders of even date 9-1-2008, passed by the learned CIT(A)-XXIV, Mumbai, for assessment years 2000-01 to 2002-03 respectively. Since assessee being same in all these appeals, therefore, these appeals were heard together and, as a matter of convenience, all the three appeals are being disposed off by way of this consolidated order.

2. The sole common dispute raised by the Revenue in all these appeals is, whether or not, the learned CIT(A) was justified in deleting the addition made on account of interest accrued on advance security deposit as notional rent.

3. Brief facts relating to the issue under consideration is that the assessee has shown rental income of Rs. 8,55,960. The Assessing Officer noticed that the assessee has received interest free deposits of Rs. 1,64,40,000. He was of the view that the assessee had taken interest free deposits from parties to whom property was let out only with a view to understate the rental income and avoid the payment of tax genuinely payable on such income. The Assessing Officer, after considering the explanation and reply of the assessee, added notional interest at the rate of 6 per cent on the deposits which is prevailing on the fixed deposits at the relevant point of time. Accordingly, the Assessing Officer has worked out the notional interest of Rs. 9,84,000, and added the same as income under the head "income from house property".

4. The assessee, being aggrieved by the stand of the Assessing Officer, carried the matter in appeal, wherein the learned CIT(A) deleted the addition made by the Assessing Officer on account of notional interest by following the decision of a co-ordinate bench of this Tribunal, Mumbai Bench, rendered in J.K. Investors (Bombay) Ltd. v. Dy. CIT [2000] 74 ITD 274. The revenue is aggrieved and is in appeal before the Tribunal.

5. Learned Departmental Representative, before us, submitted that the Hon'ble Jurisdictional High Court in CIT v. J.K. Investors (Bombay) Ltd. [2001] 248 ITR 723/[2000] 112 Taxman 107 (Bom.) the Hon'ble Jurisdictional High Court has left open the issue of addition on account of notional interest while determining the fair rent under section 23(1)(a) of the Income-tax Act, 1961 (for short "the Act"). Therefore, the learned CIT(A) has not considered the issue property and wrongly applied the decision in the case of assessee while deleting the addition. He relied on the order of the Assessing Officer as well as the Third Member decision of this Tribunal rendered in ITO v. Baker Technical Services (P.) Ltd., [2010] 125 ITD 1 (Mum.).

6. Learned Counsel for the assessee, on the other hand, submitted that when the actual rent received by the assessee is more than the municipal value and or the standard rent, then no addition can be made for determining the annual letting value under section 23(1) of the Act. She has further submitted that no addition can be made in the actual rent received or receivable by the assessee within the meaning of section 23(1)(b) of the Act and, therefore, the Assessing Officer was not justified in making addition on account of notional interest while computing the annual letting value. In support of her submissions, she relied on the following case laws: --

    l   Delite Enterprises (P.) Ltd. v. ITO [2008] 22 SOT 245 (Mum.);

    l   Midland International Ltd. v. Dy. CIT [2007] 109 ITD 198/13 SOT 149 (Delhi.); and

    l   J.K. Investors (Bombay) Ltd. (supra)

7. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. As it is evident from the assessment order that the Assessing Officer has not determined the fair rent of the property in accordance with the provisions of section 23(10)(a) of the Act and has made the addition on account of notional interest on interest free deposits received by the assessee while applying prevailing rate of interest on fixed deposit. It is not clear from the assessment order as to under which provisions, the addition on account of notional interest has been made by the Assessing Officer. For computing annual letting value for the purpose of section 22 of the Act, the Assessing Officer has to first determine the sum for which the property might reasonably be expected to let from year to year as per the provisions of section 23(1)(a) of the Act. According to the provisions of section 23(1)(a), for determining the fair rent value, the Assessing Officer has to consider various factors into account which includes the standard rent, the municipal value of the property as the case may be and other effecting factors like the benefit availed by the assessee other than the annual rent received or receivable. Therefore, for computation of annual letting value, the Assessing Officer has to first do the exercise of arriving at the fair rent of the property in question and, thereafter, the same has to be compared with the annual rent received or receivable by the assessee. If the annual rent received or receivable is more than the fair rent as computed under clause (a) than the annual rent received or receivable, will be the annual value for the purpose of section 22 of the Act. Since the Assessing Officer has not done the proper exercise of determining the fair rent as prescribed under section 23(1)(a) of the Act and the learned CIT(A) has also not adjudicated the issue after considering the fair rent and, therefore, in our view, the learned CIT(A) has not adjudicated the issue properly. The decision of Hon'ble Jurisdictional High Court rendered in J.K. Investors (Bombay) Ltd.'s case (supra) is applicable in favour of the assessee in the case where the addition on account of notional interest is made to the annual rent received or receivable within the meaning of section 23(1)(b) of the Act. It is not clear from the record under which provision the Assessing Officer has made the addition and, moreover, the requisite exercise has not been performed by the lower authorities for determining the fair rent under clause (a) of sub-section (1) of section 23, to compare the same with the annual rent/actual rent received or receivable by the assessee. The Hon'ble Jurisdictional High Court in the case of J.K. Investors (Bombay) Ltd., (supra), while adjudicating the issue, observed as follows :—

"4. In this matter, we are required to consider the scheme of taxation of income from house property. Section 22 says that the measure of income from house property is its annual value. The annual value is to be decided in accordance with section 23. Sub-section (1) of section 23, by virtue of the amendment with effect from the assessment year 1976-77, has two limbs, namely, clauses (a) and (b). Clause (a) states that the annual value is the sum for which the property might reasonably be expected to be let from year to year. Clause (b) covers a case where the property is let and the actual rent is in excess of the sum for which the property might reasonable be expected to be let from year to year. In other words, insertion of clause (b) by the Taxation Laws (Amendment) Act, 1975, covers a case where the rent for a year actually received by the owner is in excess of the lawful rent which is known as the fair rent or standard rent under the rent control legislation. The provision of section 23(1)(a) of the Income-tax Act apply both to owner-occupied property as also to property which is let out and the measure of valuation to decide the annual value is the standard rent or the fair rent. However, section 23(1)(b) only applies to cases where the actual rent received is more than the reasonable rent under section 23(1)(a) and it is for this reason that section 23(1)(b) contemplates that in such cases the annual value should be decided on the basis of the actual rent received. As stated hereinabove, in this case, the Department has invoked section 23(1)(b) which, as stated hereinabove, proceeds on the basis that the actual rent received by the assessee is more than the reasonable rent under section 23(1)(a). The Tribunal has also found that the actual rent received by the assessee, even without taking into account the notional interest, was more than the annual value determinable under section 23(1)(a) of the Act. This finding of fact has not been challenged by the Department in this appeal. On the contrary, the Department has contended that in this case section 23(1)(b) was applicable. They have not relied on the provisions of section 23(1)(a). The question as to whether notional interest could have been taken into account under section 23(1)(a) does not arise in this appeal and we do not wish to go into that question in this appeal. However, the moot point which needs to be considered in this case is whether notional interest could form part of the actual rent received by the assessee under section 23(1)(b) of the Income-tax Act. It is important to note that the property is covered by the provisions of the Bombay Rent Act. The scheme of section 23(1)(b), in contradistinction to section 23(1)(a), shows that fair rent is the basis to determine the annual value of a property. This was the sole basis prior to the assessment year 1975-76. However, after the amendment of section 23(1) by the Taxation Laws (Amendment) Act, 1975, the legislature has clearly laid down under section 23(1)(b) that when the actual annual rent received or receivable is in excess of the fair rent determinable under section 23(1)(a), then such higher actual annual rent would constitute the annual value of the property. It is important to bear in mind that under section 22, the measure of income from house property is its annual value. The annual value is to be decided in accordance with section 23(1). By virtue of the amendment, clause (a) states that annual value is the sum for which the property might reasonably be expected to be let from year to year whereas clause (b) covers a case where the property is let and the actual rent is in excess of the sum for which the property might reasonably be expected to be let from year to year. In our view, this later insertion of clause (b) by the Taxation Laws (Amendment) Act, 1975 is meant to cover a case where the rent per annum actually received by the owner is in excess of the fair rent or the standard rent under the rent control legislation. Now, in this case, the Department has invoked section 23(1)(b). Now, in this case, it has been found that the actual rent received by the assessee is more than the fair rent even without taking into account notional interest. Generally, the fair rent is fixed even under the B.M.C. Act and the Rent Act by taking into account various principles of valuation, viz., contractor's method, the rent method, etc. However, that exercise is undertaken to decide the fair rent of the property. In that connection, the actual rent received by the lessor also provides a piece of evidence to decide the fair rent of the property. However, under the Income-tax Act, the scheme is slightly different. Section 23(1)(b) provides that where the actual rent is more than the fair rent, the actual rent would be the annual value of the property. In the circumstances, the value of the notional advantage, like notional interest in this case, will not form part of actual rent received as contemplated by section 23(1)(b). At the cost of repetition it may be mentioned that under section 23(1)(a), the Assessing Officer has to decide the fair rent of the property. While deciding the fair rent, various factors could be taken into account. In such cases various methods like contractors method could be taken into account. If on comparison of the fair rent with the actual rent received, the Assessing Officer finds that the actual rent received is more than the fair rent determinable as above, then actual rent shall constitute the annual value under section 23(1)(b). Now, applying the above test to the facts of this case, we find a categorical finding of fact recorded by the Tribunal that the actual rent received by the assessee was more than the fair rent. Under the above circumstances, in view of the said finding of fact, we do not see any reason to interfere. Before concluding we may point out that under section 23(1)(b), the word 'receivable' denotes payment of actual annual rent to the assessee. However, if in a given year a portion of the actual annual rent is in arrears, it would still come within section 23(1)(b) and it is for this reason that the word 'receivable' must be read in the context of the word 'received 'in section 23(1)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by section 23(1)(b). We once again repeat that whether such notional interest could form part of the fair rent under section 23(1)(a), is expressly left open."

8. From the above observations of the Hon'ble Jurisdictional High Court, it is clear that no addition can be made on account of notional interest in the annual rent or actual rent received or receivable by the assessee in terms of the provisions of section 23(1)(b), because the notional interest cannot form part of actual rent as contemplated by the provisions of section 23(1)(b). However, the issue of notional rent may form part of fair rent under section 23(1)(a), as the issue has been expressly left open. The Hon'ble Jurisdictional High Court has also observed that the Assessing Officer has to decide the fair rent of the property under section 23(1)(a) and while deciding the fair rent of the property, can be taken into account various factors including the methods like contractor's method. Thus, the order of the learned CIT(A) is not sustainable and liable to be set aside. We further note that the Third Member decision of the Tribunal rendered in Baker Technical Services (P.) Ltd. (supra), the Tribunal observed as follows :—

"17. However, whereas I agree with the learned AM that in this case the fair rental value was to be determined by considering various factors, I do not agree with him about the quantum of the fair rent determined by the Assessing Officer, which has been approved by the learned AM. It is pertinent to mention that the Assessing Officer in this case has adopted the rent received by the assessee from non-resident company in the previous year relevant to assessment year 2000-01 for a period of four months. Whereas the rent received during any period would be a relevant factor for considering the fair rental value, yet one has to keep in mind various factors which may deflate or inflate the rental value. The Assessing Officer as well as the learned AM have overlooked vital fact in this case that the same property has been let out at substantially lower rent to Deutsche Bank AG and subsequently to Bombay Stock Exchange. Admittedly, the assessee, apart from the rent received from Deutsche Bank AG and Bombay Stock Exchange, has received interest-free deposits from the tenants. As per the decision of the Bombay Bench of the Tribunal in the case of J.K. Investors (Bombay) Ltd. (supra), the benefit derived by the assessee from the interest-free deposit could be taken into consideration for determination of fair rental value under section 23(1)(a) of the Act. In my considered view, the benefit derived by the assessee from the interest-free deposit could not be more than the lending rate at which the deposits were available in the market at the particular point of time. Even if that is taken into account, the fair rental value of the property does not work out to the amount determined by the Assessing Officer and confirmed by the learned AM. I, therefore, partly agree with the learned AM that the ALV in this case cannot be limited to standard rent but I do not agree with him that the fair rent adopted by the Assessing Officer is justified. I partly agree with the learned JM that the matter has got to go back to the Assessing Officer instead of adopting the value determined by the Assessing Officer. I hold accordingly.

18. Since this case is peculiar insofar as I have partly agreed with learned AM and partly with learned JM, I would like to give the following opinion : That in this case the ALV cannot be limited to the standard rent as workable under the Rent Control Act but the fair rental value shall have to be determined. The fair rental value determined by the Assessing Officer however is not reasonable. The learned JM had proposed to set aside the order of the Assessing Officer. To that extent I have agreed with him. So however, I have not agreed with him that the standard rent is to be determined and adopted as ALV under section 23(1)(a) of the Act. The learned AM has held that the standard rent is not to be adopted. I have agreed with him to this extent. So however, I have not agreed with him that the fair rental value has to be adopted as adopted by the Assessing Officer. The issue shall be set aside and restored to Assessing Officer for determination of the fair rent to be adopted as the annual letting value.

19. The majority view can be formed on the basis of the above decision. So however, in case the Division Bench of the Tribunal considers it difficult to form the majority opinion as per the orders in this case, it is suggested that a reference may be made to the Hon'ble President for making a further reference to a Member or Members for resolving the difference of opinion in accordance with law."

9. In view of the aforesaid discussions, we set aside the orders passed by the learned CIT(A) for all the years under assessment and restore the issue back to the file of Assessing Officer for de novo adjudication in the light of our above observations and in accordance with law.

10. In the result, all the appeals filed by the revenue stand allowed for statistical purposes.

 

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