Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2005-06. The appeal is directed against the order of the Commissioner (Appeals) – 7, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:
i. The order passed by the Commissioner of Income-tax (Appeals) is illegal, bad in law, ultra vires and contrary to the provisions of law and facts of the case and without appreciating the facts of the case in their proper perspective. ii. The Learned Commissioner of Income Tax (Appeals) erred in adding Rs. 9,86,000/- as rent receivable u/s 23(1)(b) and failed to appreciate that under section 23(1)(b) only the actual rent received or receivable can be taken into consideration and not any notional advantage by considering 10% notional interest free deposit received from the tenant.
3. In a nutshell, the facts are that based on the monthly rental receipts of Rs. 9,000/-, the assessee has shown income from house property at Rs. 1,08,000/- during the impugned assessment year. However, the Assessing Officer (AO) observed that the assessee had taken security deposit of Rs. 98,60,000/- from the tenant M/s. Reliance Industries Ltd. and as a result, the said agreement for rent was signed on a meagrely sum of Rs. 9,000/- p.m. The AO further noted that the property Flat No. 41, Vijaydeep, Khar, Mumbai is located in a very posh locality and therefore rent charged by the assessee was on a very low side of the market rate charged in the area. Accordingly, the AO sought to make an addition to the Annual Letting Value (ALV) on the basis of notional interest of 10% of the deposit of Rs. 98,60,000/- taken from the tenant. At the time of the assessment proceedings, the assessee submitted that ‘there was no provision in the Act to make any addition on account of notional interest and that the ALV u/s 23(1)(a) cannot exceed the maximum ceiling of rent laid down in the appropriate rent control legislation.’ Thus the assessee submitted before the AO that the rent determined cannot exceed the ceiling of rent fixed by Bombay Rent Control Act (BRCA). The AO did not agree with the above contention of the assessee as BRCA was not applicable because the paid up capital of the tenant, M/s. Reliance Industries Ltd. far exceeded Rs. 1 crore and thus fell outside the clauses under the BRCA. The AO relied on the decision in the case of Corporation of Calcutta vs. Sm. Padma Debi AIR 1961 SC 151, 153 wherein the following is held:
“A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rte of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness” The AO concluded that the provisions of section 23 were amended w.e.f. 01.04.1976 to include such cases where the rent received or receivable was in excess of municipal valuation and accordingly he made an addition of Rs. 9,86,000/- i.e. 10% of the term deposit of Rs. 98,60,000/- to the income from house property declared by the assessee.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). We find that the learned CIT(A) upheld the above assessment made by the AO for the reasons that (i) the case of the assessee is not covered under the provisions of BRCA since the tenant M/s. Reliance Industries Ltd. has paid up capital of more than Rs. 1 crore, hence the decisions relied by the assessee on the presumption that the premises in question fell under the respective Rent Control Act are not applicable to the facts of the instant case, (ii) the reliance placed by the assessee on CBDT Circular No. 204 dated 24.07.1976 is misplaced as the said Circular states “in many cases, however the actual rent received or receivable in a year exceeds the municipal valuation of the property. Sub-section 1 of section 23 has been amended to provide that where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property, (iii) the rental agreement fixing a nominal rent of Rs. 9,000/- p.m. for a flat in a posh locality is nothing but a colourable device to avoid tax. Therefore, the learned CIT(A) upheld the assessment of the AO in making an addition @ 10% of security deposit to the ALV declared by the assessee.
Before us, the learned counsel of the assessee relies on the judgment of Hon'ble Bombay High Court in CIT vs. Tip Top Typography (2014) 368 ITR 330 (Bom), judgment of the Hon'ble Delhi High Court in CIT vs. Asian Hotels Ltd. (2010) 323 ITR 490 (Del), and the order of the ITAT “H” Bench, Mumbai in the case of the assessee for the A.Y. 2004-05 (ITA No. 4591/Mum/2007).
Per contra the learned DR relies on the order passed by the learned CIT(A) upholding the addition @ 10% of security deposit made by the AO to the ALV declared by the assessee.
We have heard the rival submissions and perused the relevant material on record. We discuss below the decisions cited before us.
7.1 In the case of Asian Hotels Ltd. (supra), the question before the Hon’ble High Court was as follows:
“Whether the Tribunal was justified in law in holding that the notional interest on refundable interest free deposit received by the assessee in respect of a shop let out on rent was neither taxable as business profit under section 28(iv) of the Income-tax Act, 1961 (the Act) nor income from house property under section 23(1)(a) of the Act?” The Hon'ble High Court held as under:
“Section 23(1)(a) is relevant for determining the income from house property and concerns determination of the annual letting value of such property. That provision talks of the sum for which the property might reasonably be expected to be let from year to year. This contemplates the possible rent that the property might fetch and not certainly the interest in fixed deposit that may be placed by the tenant with the landlord in connection with the letting out of such property. It must be remembered that in a fixing 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. The attempt by earned counsel for the revenue to draw an analogy from the Wealth Tax Act, 1957, is also of no avail. It is an admitted position that there is a specific provision in the Wealth Tax Act which provides for considering of a notional interest whereas section 23(1)(a) contains no such specific provision. 7.2 In the case of Tip Top Typography (supra), the Hon'ble Bombay High Court held as under:
“It is thus, manifest that various courts haves held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that that has been stated in Asian Hotels Ltd. (2010) 323 ITR 490 (Delhi).” 7.3 Now we turn to the order of the Co-ordinate Bench in the case of the assessee for the A.Y. 2004-05 (ITA No. 4519/Mum/2007):
“2. Facts of the case in brief are that the assessee was the owner of Flat No. 41, Vijaydeep, Khar Mumbai which was rented out @ Rs 9,000/- per month to M/s. Reliance Industries Ltd. The annual letting value of the property was shown by the assessee at Rs 1,08,000/-. The assessee had also received interest free security deposit of Rs 98,60,000/- from the tenant.
During the course of assessment proceedings, the Assessing Officer asked the assessee as to why notional interest @ 10% on the said deposit be not considered as a part of the rent for working out the income under the head “Income from house property”. The assessee submitted that the decision in the case of CIT vs. J.K. Investments Ltd. 241 ITR 723(Bom) and CIT vs Satya Co. Ltd. 75 Taxman 193 (Cal), notional interest on interest free security deposit received from the tenant cannot be considered as a part of the rental income. The assessee further contended that as per Sec. 23(1)(a) of the I.T. Act, the annual value of house property chargeable under the head “Income from house property” is the sum for which the property might reasonably being expected to let. The words used in Sec. 23(1)(a) are the same as the expression used in the municipal statute and therefore, the annual value of the property as defined in Sec. 23(1)(a) of the I.T. Act is the municipal valuation. The assessee further contended that Sec. 23(1)(a)
is applicable when the actual rent received or receivable exceeds the municipal value of the property. Since the actual rent received in the case of the assessee was greater than the municipal valuation, the same i.e. the amount of Rs 1,08,000/- has to be treated as the annual letting value.
However, the Assessing Officer did not accept the contention of the assessee. According to the Assessing Officer, Rent Control Act is not applicable to the property owned by the assessee since the capital of the tenant exceeded Rs 1 crore. Further, according to him, both the tenants and the assessee company belonged to the same group of companies because of which there are chances of collusion between the assessee company and the tenant in fixing the rent at meager sum of Rs 9,000/- per month. Therefore, he proceeded to treat 10% of the interest free security deposit of Rs 98,60,000/- as a part of the rental income of the assessee. Accordingly, he computed the income from house property by taking the annual letting value of the property at Rs 10,94,000/- (`Rs 1,08,000+ Rs 9,86,000/-).
5. The Ld. CIT(A) deleted the addition of Rs 9,86,000/- made by the Assessing officer to the Annual Letting value of the property in respect of notional interest worked out at 10% on interest free deposit of Rs 98,60,000/- to the actual rent of Rs 1,08,000/- and adopted the Annual Letting value of the property u/s. 23(1)(b) at Rs 10,94,000/- 6. Aggrieved, Revenue preferred an appeal before us.
7. We heard both the parties. We find that the recent decision of the (Delhi High Court)-Full Bench in the case of CIT vs Moni Kumar Subhas has held as follows: “If Assessing Officer finds that the actual rent received is less than the “Fair market rent” because the assessee has received abnormally high interest from security deposit, 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 the “fair rent” Sec. 23(1)(a) of the I.T. Act, 1961 does not mandate this.” Therefore, we confirm the order of the Ld. CIT(A) and dismiss the Revenue’s appeal. “ 8. Facts being similar, we follow the decisions narrated at para 7.1 to 7.3 here-in-above and allow the appeal filed by the assessee.
Order pronounced in the open Court on 19/04/2017