2011 (4) TMI 876 - AT - Income Tax

Tribunal adjusts rent valuation, allows deductions under Section 24, affirms licensing income as house property.

The Tribunal partially allowed the appeals, directing the AO to reassess fair rent and annual letting value by considering relevant factors and allowing ... Income from House property - Annual Letting Value - assessee entered into an agreement with Builder for acquisition of premises office, of which no lease is granted till date - assessee had let out property to CITI Bank vide three agreement with it - first agreement was for granting leave and license - Vide second agreement assessee received the interest free security deposits of Rs.1,54,00,000 from the CITI Bank - third agreement was for availing an overdraft facility upto Rs.51,00,000 from CITI bank - annual maintenance charges received from CITI bank are reimbursed to builder from whom the assessee has purchased the property - Revenue determined Annual Rateable Value of the property in question by adding 15% interest on free deposits - Held that:- No addition of notional interest can be made for arriving at the annual value u/s 23(1)(a) or 23(1)(b). When the ALV is determined u/s 23(1)(a), with reference to the fair rent and then to such value no further addition can be made. The fair rent takes into consideration everything. 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 AO however is not reasonable. Infact it is clear from the order of AO that the AO has not even made an attempt to determine the fair rent u/s 23(1)(a). Hence, we set aside the order of the AO for determination of the fair rent to be adopted as the annual letting value. Whether income from licensing of premises is assessable as profits and gains of business because the assessee is not the owner of the property in question - Held that:- It is clear that the assessee acquired the property under the provisions of Maharashtra Ownership Flats Act, 1963 and even otherwise, the assessee falls under the provisions of section 27(iiia). Further, the legal position is well settled that even under the common law the assessee may not have a legal title over the property but in the context of section 22 the owner is the person who is entitled to receive income from the property in his own right. There is no dispute about the right of the assessee to receive the income from the property in question, therefore, such income would be taxable under head 'Income from House Property' Issues Involved:1. Imputing interest on interest-free deposits as rent.2. Consideration of other let-out properties for estimating income.3. Computing annual letting value higher than standard rent.4. Estimation of income from house property.5. Non-receipt of benefit at the time of receiving interest-free deposits.6. Benefit accrual only upon deployment of funds.7. Deductions under section 24 of the Income-tax Act.Issue-wise Detailed Analysis:1. Imputing Interest on Interest-Free Deposits as Rent:The Tribunal examined whether the interest-free security deposits received by the assessee should be considered as part of the rental income. The AO added 15% interest on the deposit amount of Rs.1,54,00,000, treating it as compensation/rent for the premises. This approach was upheld by the CIT(A). The Tribunal referred to its earlier decision in the assessee's own case for the assessment years 1990-91 and 1991-92, where it was held that notional interest on such deposits could be considered as part of the rent. However, the Tribunal noted that this principle was not universally accepted and was subject to further judicial scrutiny.2. Consideration of Other Let-Out Properties for Estimating Income:The AO considered the rent of similar properties in the same building to estimate the income from the assessee's property. The Tribunal found that the AO had not conducted a thorough inquiry or applied a consistent method to determine the fair rent. The Tribunal emphasized the need to consider various factors, including municipal valuation and standard rent, while determining the fair rent under section 23(1)(a).3. Computing Annual Letting Value Higher Than Standard Rent:The Tribunal highlighted that the AO must first determine the fair rent expected to be fetched by the property under section 23(1)(a) and then compare it with the actual rent received or receivable under section 23(1)(b). It was noted that the AO had not followed the proper procedure in this case. The Tribunal directed the AO to determine the fair rent by considering all relevant factors, including municipal valuation and standard rent, and then compare it with the actual rent received.4. Estimation of Income from House Property:The Tribunal reiterated that the AO must determine the fair rent expected to be fetched by the property under section 23(1)(a) and then compare it with the actual rent received under section 23(1)(b). The Tribunal directed the AO to conduct a fresh assessment by considering various factors, including municipal valuation and standard rent, to determine the fair rent.5. Non-Receipt of Benefit at the Time of Receiving Interest-Free Deposits:The Tribunal noted that the interest-free deposits were received as a security for ensuring the fulfillment of the terms and conditions of the leave and license agreement. It was held that the benefit of such deposits should not be considered as part of the rental income unless it was shown that the actual rent received was less than the fair rent due to the high security deposit.6. Benefit Accrual Only Upon Deployment of Funds:The Tribunal emphasized that the benefit from interest-free deposits should be considered only when the funds are deployed and income accrues from such deployment. The Tribunal directed the AO to consider this aspect while determining the fair rent and annual letting value.7. Deductions Under Section 24 of the Income-tax Act:The Tribunal directed the AO to allow the deductions under section 24, such as ground rent, maintenance charges, and municipal taxes, while computing the income from house property. The Tribunal noted that these deductions were statutorily allowable and should be considered in the assessment.Additional Issue - Income from Licensing of Premises:The assessee raised an additional ground, claiming that the income from licensing of premises should be assessed as business income instead of income from house property. The Tribunal rejected this claim, holding that the assessee was deemed to be the owner of the property under section 27(iiia) of the Income-tax Act, and the income from licensing was rightly assessed as income from house property. The Tribunal relied on the Supreme Court's decision in the case of CIT v. Podar Cement (P.) Ltd., which held that the owner is the person entitled to receive income from the property in his own right.Conclusion:The Tribunal allowed the appeals partly for statistical purposes, directing the AO to reassess the fair rent and annual letting value by considering all relevant factors, including municipal valuation and standard rent, and to allow the statutory deductions under section 24. The additional ground raised by the assessee was dismissed.