2018 (5) TMI 1898 - AT - Income Tax

Tribunal rules ALV based on municipal rateable value, rejects Assessing Officer's fair market value estimation

Hightech Realties Pvt. Ltd. Versus The Income Tax Officer, Mumbai

The Tribunal allowed the appeal, holding that the Annual Letting Value (ALV) should be based on the municipal rateable value and Rent Control Act ... Income from house property - Deemed rent under the head of income from House property - ALV computed by the AO under section 23(1)(a) - property is covered under rent control Act as the Bombay is governed by rent Control Act - as argued by assessee that once the property value is determined by Rent Control Act and ALV declared by assessee is in excess of market rateable value of BMC, no further fair market value of the property for the purpose of deemed rent under section 23(1)(a) or 23(1)(c) can be estimated - HELD THAT:- As in the case of CIT vs. Moni Kumar Subba [2011 (3) TMI 497 - DELHI HIGH COURT] that even ALV cannot be determined by adding notional interest on the interest free deposit and according to Hon’ble High Court that it is not permissible. Hon’ble Delhi High Court and TIP TOP TYPOGRAPHY [2014 (8) TMI 356 - BOMBAY HIGH COURT] both are in consonance that only value fixed by Municipal Authorities can be a rational yardstick for computing deemed rent under section 23(1)(a). As the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Tip Top Typography (supra), respectfully, following the same I delete the addition made by AO and allow the appeal of assessee. - Appeal of assessee is allowed. Issues Involved:1. Assessment of deemed rent under the head of income from House Property.2. Determination of Annual Letting Value (ALV) under section 23(1)(a) and 23(1)(c) of the Income Tax Act, 1961.3. Applicability of Rent Control Legislation in determining ALV.4. Consideration of municipal rateable value versus fair market value.Detailed Analysis:1. Assessment of Deemed Rent under the Head of Income from House Property:The primary issue in this appeal is the assessment of deemed rent under the head of income from House Property. The assessee declared rental income from a flat at Rs. 50,000 per month, totaling Rs. 6 lakhs for the AY 2012-13. The Assessing Officer (AO) considered this rental income to be low and estimated the fair market rent at Rs. 2 lakhs per month, resulting in an income chargeable to tax under the head income from house property at Rs. 24 lakhs. After deductions, the AO computed the income from house property at Rs. 16.80 lakhs against the declared income of Rs. 4.20 lakhs.2. Determination of Annual Letting Value (ALV) under Section 23(1)(a) and 23(1)(c) of the Income Tax Act, 1961:The CIT(A) confirmed the AO's action but adjusted the ALV to Rs. 15 lakhs, allowing a standard deduction of 30% (Rs. 4.50 lakhs), resulting in an income from house property of Rs. 10.50 lakhs. The CIT(A) noted that the ALV should be determined considering the rateable value as determined by the BMC and the rent declared by the assessee.3. Applicability of Rent Control Legislation in Determining ALV:The assessee argued that since the property is covered under the Rent Control Act, the ALV should not exceed the standard rent fixed under the Rent Control Act. The CIT(A) and the Tribunal agreed that the property is governed by the Rent Control Act and that the ALV declared by the assessee is in excess of the market rateable value of BMC. The Tribunal referred to the Bombay High Court's decision in CIT vs. Tip Top Typography, which emphasized that the municipal rateable value can be a safe guide for determining ALV, and the AO must have cogent material to deviate from it.4. Consideration of Municipal Rateable Value versus Fair Market Value:The Tribunal noted that the AO cannot arbitrarily estimate the fair market value without considering the municipal rateable value and the provisions of the Rent Control Act. The Tribunal cited the Delhi High Court's decision in CIT vs. Moni Kumar Subba, which held that notional interest on interest-free deposits should not be added to the ALV. The Tribunal concluded that the municipal rateable value is a rational yardstick for computing deemed rent under section 23(1)(a) of the Act and deleted the addition made by the AO.Conclusion:The Tribunal allowed the appeal of the assessee, emphasizing that the ALV should be determined based on the municipal rateable value and the provisions of the Rent Control Act. The AO's estimation of fair market value was deemed without basis, and the addition made by the AO was deleted.Order Pronouncement:The order was pronounced in the open court on 31-05-2018.