TaxTMI 
TaxTMI 
2011 (3) TMI 497
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.... referred question would lead to the decision on merits in the appeals itself and, therefore, we not only answer the reference, but the appeals be also finally decided by this Court. With these preliminary and introductory remarks, we take up the facts which appear in ITA No.499 of 2008 and the nature of reference made by the Division Bench vide orders dated August 16, 2010. Since learned counsel for the parties were also unanimous that the facts as recorded in the orders dated August 16, 2010 are correctly reproduced for answering this reference, it would be convenient for us to reproduce those facts, without any fear of contradiction: "1. The assessee had filed the return for the Assessment Year 2001-02 declaring an income of Rs.2,52,510/-. While framing the assessment under Section 143(1) of the Income Tax Act (hereinafter referred to as „the Act), the Assessing Officer (AO) found that the assessee had let out property bearing No.267, Masjid Moth, Uday Park, New Delhi. The total rent received for the part period was Rs.6.95 lakhs. In fact, monthly rent agreed between the assessee (landlord) and the tenant was Rs.90,000/-. However, the assessee had also taken secu....
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.... DETERMINED. (1) For the purposes of section 22, the annual value of any property shall be deemed to be - (a) The sum for which the property might reasonably be expected to let from year to year; or (b) Where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable : Provided that where the property is in the occupation of a tenant, the taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by the owner, be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him : Provided further that the annual value as determined under this sub-section shall, - (a) In the case of a building comprising one or more residential units, the erection of which is begun after the 1st day of April, 1961, and completed before the 1st day of April, 1970, for a period of three years from the date of comp....
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....evious year, the actual rent received or receivable by the owner in respect of such year; and (b) In any other case, the amount which bears the same proportion to the amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears to such period. Explanation 2 : For the removal of doubts, it is hereby declared that where a deduction in respect of any taxes referred to in the first proviso to this sub-section is allowed in determining the annual value of the property in respect of any previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any earlier assessment year), no deduction shall be allowed under the first proviso in determining the annual value of the property in respect of the previous year in which such taxes are actually paid by the owner. (2) Where the property consists of - (a) A house or part of a house in the occupation of the owner for the purposes of his own residence, - (i) Which is not actually let during any part of the previous year and no other benefit therefrom is derived by the owner, the annual value of such house or p....
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....al course of letting out of property, the advance rent/security deposits varies from six months to three years. Even if three years, security deposit is to be taken into consideration, the amount would be much lower than the actual amount of Rs.8.58 Crores in respect of the property at Masjid Moth. The same would be the position in respect of Adhichini property. He also relied upon the bye-laws of Municipal Corporation of Delhi as per which where the value of interest free security deposit or advance is in the excess of six months rent, an amount equal to 12.5% of the amount, depending on the prevailing bank rate, shall be added to the amount of rent received by the landlord to determine the reteable value of the premises. On the basis of this formula, he worked out 12% interest on the excess amount of security deposit and added a sum of Rs.30.41 lakhs. 6. Before the CIT (A), the contention of the assessee was that the expression „expected to let from year to year as appearing in Section 23(1)(a) would mean that only standard rent or actual rent, whichever is higher has to be adopted for the purpose of Section 23(a). In the present case, the annual rent was higher than the st....
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....at would be the sum, i.e., the rent which the property might fetch if let-out from year to year. It would mean that „fair rent which the property can fetch, when if let-out, is to be arrived at. However, learned counsel for the Revenue before the Division Bench and also before us submitted that even while ascertaining the annual letting value for the purposes of Clause (b) of Section 23 (1), it is necessary to determine the „fair rent‟ in terms of Clause (a). It was for this reason, learned counsel had argued that actual rent at which the property had been let-out is to be compared with the fair rent which the property might reasonably be expected to let out from year to year and higher of the two is to be taken as annual letting value. Mr. Sabharwal, learned counsel for the Revenue, exemplified the same by submitting that to arrive at the annual value of the property, one has to examine as to what would be the rent, which it is expected to receive. If the annual rent actually received is more than that, the said sum shall be treated as income from house property. On the other hand, if it is lesser than the amount at which the property can reasonably be expected t....
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.... "16. The reading of the aforesaid case law brings out the following position in so far as considering of notional interest under Section 23 (1) (a) of the Act is concerned:- (i) The Bombay High Court in J.K. Investors (supra) left this question open. However, it categorically held that the AO was required to determine the "fair rent" which the property might reasonably be expected to earn. (ii) The Calcutta High Court as well as the Division Bench of this Court has categorically held that Section 23 does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. (iii) While doing so, the Courts have adopted the rateable value of the property to be calculated either under the Rent Control Act or under the Municipal Laws." 8. On this basis, the case at hand was discussed and the questions which arose for consideration and referred to the Larger Bench are spelt out in Paras 17 & 18 of the order which need to be reproduced: "17. In so far as the present case is concerned, the Delhi Rent Control Act is admittedly not applicable as the rent was more than Rs 3500/- per month. No doubt, the annual....
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....idden in the form of security?" 9. Before we proceed to answer the aforesaid questions, we may recapitulate here the admitted position in these appeals: (a) In all these cases in addition to contractual rent, substantial amount by way of interest free security is given. The security deposit is many times more than the annual rent received by the assessee. (b) Nonetheless, the annual letting value arrived at by the Municipal Corporation is less than the contractual rent received by these assessees. (c) The AO while arriving at the „fair rent has added notional interest on the aforesaid security to the actual rent received to arrive at the annual letting value. (d) In none of these cases, the provisions of Delhi Rent Control Act apply. Therefore, question of fixing of standard rent as per the formula laid down in Delhi Rent Control Act would not be relevant. We are making these remarks for the reason that it is an admitted position if the property is covered by the Delhi Rent Control Act, then the standard rent under the said Act could be treated as „fair rent in view of various judgments. The counsel for the parties conce....
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....e Revenue is not to be brushed aside as irrational, yet the contention is not acceptable as the law itself comes short of tackling such fact-situation." 12. This view of the Calcutta High Court has been accepted by a Division Bench of this Court as well in the case of Commissioner of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.) 84] holding that the notional interest on refundable security, if deposited, was neither taxable as profit or gain from business or profession under Section 28(iv) of the Act or income from house property under Section 23(1)(a) of the Act. Rationale given in this behalf was as under: "A plain reading of the provisions indicates that the question of any notional interest on an interest free deposit being added to the income of an assessed on the basis that it may have been earned by the Assessee if placed as a fixed deposit, does not arise. Section 28 (iv) is concerned with business income and is distinct and different from income from house property. It talks of the value of any benefit on perquisite, "whether convertible into money or not" arising from "the business or the exercise of a profession." It has been explained by....
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....urity can be taken as determinative factor to arrive at a „fair rent. Provisions of Section 23(1)(a) do not mandate this. The Division Bench in Asian Hotels Limited (supra), thus, rightly observed that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd., [(2001) 248 ITR 723 (Bom.)] categorically rejected the formula of addition of notional interest while determining the „fair rent in the following manner: "..........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....
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....the income under s. 2(24) of the Act. Specific provisions have also been made under different heads for adding such benefits or perquisites as income while computing income under those heads, e.g., salary, business. The computation of the income under the head House property is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefore is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope or justification whatsoever for making any addition for any notional interest for determining the annual value. Whatever benefit or advantage which is derived from the deposits - whether by way of saving of interest or of earning interest or making profits by investing such deposit - t....
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.... and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness." 16. Thus the rateable value, if correctly determined, under the municipal laws can be taken as ALV under Section 23(1)(a) of the Act. To that extent we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value is not binding on the assessing officer. If the assessing officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. CIT [1975] 101 ITR 810. 17. The above discussion leads to the following conclusions: (i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances, (ii) An inflated or deflated rent based on extraneous ....