2000 (6) TMI 9 - HC - Income Tax

Actual or receivable rent is annual value under section 23(1)(b); notional interest on interest-free deposit excluded

Commissioner Of Income-Tax Versus JK. Investors (Bombay) Ltd.

The HC held that for purposes of section 23(1)(b) of the Income-tax Act the annual value is the actual/receivable rent and does not include notional ... Property - Annual Value - notional interest - part of actual rent received or receivable under section 23(1)(b) - scheme of taxation of income from house property​​​​​​​ - Whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling under section 23(1)(b) of the Income-tax Act, 1961? - HELD THAT:- The annual value is to be decided in accordance with section 23(1). By virtue, of the amendment, 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 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., the contractors' 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 the actual rent received as contemplated by section 23(1)(b) of the Act. 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 the 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 the actual rent shall constitute the annual value under section 23(1)(b) of the Act. 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. Thus, 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) of the Act. 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. Appeal is dismissed. Issues involved: Interpretation of whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling u/s 23(1)(b) of the Income-tax Act, 1961.Summary:The High Court of Bombay considered the appeal concerning the inclusion of notional interest on an interest-free deposit in the calculation of rent received by the assessee under section 23(1)(b) of the Income-tax Act, 1961. The assessee had let out premises to a lessee who made a security deposit without any interest payable. The Assessing Officer included notional interest in the annual value of the property, which was upheld by the Commissioner of Income-tax (Appeals) but overturned by the Tribunal. The Tribunal held that section 23(1)(b) only applies to actual rent received and not notional interest, thus allowing the appeal. The Department appealed under section 260A of the Income-tax Act, challenging the Tribunal's decision.The Court noted that section 23(1)(b) was invoked by the Department, covering cases where actual rent received exceeds the reasonable rent under section 23(1)(a). The Tribunal found that the actual rent received was already higher than the annual value determinable under section 23(1)(a), and thus section 23(1)(b) applied. The Court referenced previous judgments to explain the distinction between sections 23(1)(a) and 23(1)(b) in determining annual property value based on actual rent received.The Court emphasized that under section 23(1)(b), the actual rent exceeding the fair rent constitutes the annual value of the property. Notional interest, in this case, could not be considered part of the actual rent under section 23(1)(b). The Court clarified that the word 'receivable' in section 23(1)(b) refers to actual annual rent payments to the assessee, even if some rent is in arrears. Notional interest was deemed irrelevant to the calculation under section 23(1)(b) and left open the question of its inclusion under section 23(1)(a).Ultimately, the Court dismissed the appeal, upholding the Tribunal's decision that notional interest should not be included in the calculation of actual rent under section 23(1)(b) of the Income-tax Act.