2011 (5) TMI 507 - AT - Income Tax

Assessing Officer's Addition of Notional Interest on Security Deposit Disallowed

The Tribunal concluded that the addition made by the Assessing Officer on account of notional interest on the interest-free security deposit while ... Determining the ALV under section 23(1)(a) - Addition made by AO by determining the ALV u/s 23(1)(a) on account of notional interest on interest free deposits - Held that:- As case of Moni Kumar Subba [2011 (3) TMI 497 - DELHI HIGH COURT] and Operative words in section 23(1)(a) of the Act are 'the sum for which the property might reasonably be expected to let from year to year'. These words provide a specific direction to the revenue for determining the 'fair rent'. The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the 'fair/market rent' because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at a 'fair rent'. In the case in hand, though, AO made an enquiry about the fair market rent of the property and has given a finding that due to interest free deposit received by the assessee, actual rent of the property is deflated. However, the Assessing Officer, while determining the fair market rent under section 23(1)(a) has directly added 10 per cent of the interest free deposit being the bank interest rate prevailing on FD. In view of the Full Bench decision of the Hon'ble Delhi High Court cited supra, no addition can be made on notional interest on the interest free security deposit while determining the ALV under section 23(1)(a) - set aside the issue to the record of the Assessing Officer with a direction to re-adjudicate the issue. Issues Involved:1. Justification of CIT(A) in deleting the addition made by the Assessing Officer by determining the Annual Letting Value (ALV) under section 23(1)(a) on account of notional interest on interest-free deposits.Issue-Wise Detailed Analysis:1. Justification of CIT(A) in Deleting the Addition:The core issue for consideration is whether the CIT(A) was justified in deleting the addition made by the Assessing Officer by determining the ALV under section 23(1)(a) on account of notional interest on interest-free deposits of Rs. 5,25,00,000.Facts of the Case:The assessee company entered into a leave and license agreement with a tenant on 9-10-2002 for a period of 33 months with effect from 1-11-2002 on a monthly rent of Rs. 1 lakh. Additionally, the assessee received an interest-free deposit of Rs. 5,25,00,000 from the tenant. The rental income was declared at the rate of Rs. 1 lakh per month for the respective period for all three assessment years. The Assessing Officer determined the ALV under section 23(1)(a) by taking into account 10% of the interest-free deposit, equating to Rs. 5.25 crores, and applied a 10% rate as the basis of interest for long-term fixed deposits.CIT(A) Decision:On appeal, the CIT(A) deleted the addition by following the decision of the jurisdictional High Court in the case of CIT v. J.K. Investors (Bombay) Ltd. [2001] 248 ITR 723/[2000] 112 Taxman 107 (Bom.).Revenue's Argument:The revenue argued that the jurisdictional High Court in the case of J.K. Investors had kept open the issue of notional benefit, and the issue is now settled by the Full Bench of the Hon'ble Delhi High Court in CIT v. Moni Kumar Subba [2011] 333 ITR 38/199 Taxman 301/10 taxmann.com 195.Assessee's Argument:The assessee relied on the order of the Coordinate Bench of the Tribunal in the case of Dy. CIT v. Reclamation Reality India (P.) Ltd. [IT Appeal No. 1411/Mum./2007, dated 26-11-2010] and submitted that the CIT(A) was right in holding that no notional benefit on account of interest-free deposit for the purpose of determining the ALV can be added.Tribunal's Analysis:The Tribunal considered the rival contentions and perused the relevant material on record. They noted that for taxation of income from house property, section 22 prescribes the annual value of the property. Section 23 contemplates the manner in which the annual value has to be determined. According to section 23(1)(a), the Assessing Officer must determine the reasonable rent expected to be fetched by the property from year to year. The Tribunal also noted that the Income-tax Act does not define the term 'reasonable expected rent,' and no method for its determination is provided in the Act or the Rules. Judicial pronouncements have provided guidance on this issue.The Tribunal referred to the decision of the Full Bench of the Hon'ble Delhi High Court in Moni Kumar Subba, which clarified that notional interest on interest-free security deposits cannot be taken as a determinative factor to arrive at a fair rent. The Tribunal observed that the Assessing Officer had not followed the proper procedure under section 23(1) and had directly added 10% of the interest-free deposit as notional interest.Conclusion:The Tribunal concluded that the addition made by the Assessing Officer on account of notional interest on the interest-free security deposit while determining the ALV under section 23(1)(a) was not permissible. They set aside the issue to the record of the Assessing Officer with a direction to re-adjudicate the issue in terms of the Full Bench decision of the Hon'ble Delhi High Court in Moni Kumar Subba.Final Decision:The appeals filed by the revenue were allowed for statistical purposes, and the matter was remanded back to the Assessing Officer for re-determination of the ALV as per the guidelines provided.