ITO 3(1)(2), MUMBAI vs. BOMBAY SEALINK BUILDERS P.LTD, MUMBAI

The only common grounds of appeal

Briefly stated, the facts are that the Assessing Officer while completing the assessment noticed that the Assessee has received an amount of Rs.3.5 crores as interest free security deposit from HSBC Bank for the property rented out by the Assessee for Rs.9 lakhs per annum. The Assessing Officer was of the view that 10% of the security deposit should be considered as reasonable percentage of interest and this should be added to the rental value of the property for arriving at Annual Letting Value of the property. The Ld. CIT

The Ld. DR vehemently submits that the Assessee has shown the rental value less and Assessee has received interest free rental deposit to the tune of Rs.3.5 crores, therefore, the Assessing Officer is justified in assessing 10% of the deposit as notional interest from the interest free deposit as ALV apart from the rental income.

The Ld. Counsel for the Assessee vehemently supported the orders of the Ld. CIT (Appeals) and also placed reliance on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Tip Top Typography (supra) and submits that the Ld. CIT(Appeals) is justified in deleting the addition.

We have heard the rival submissions, perused the orders of the authorities below. We find that this issue has been considered by the Coordinate Bench in the case of DCIT Vs. Dinesh M Shah in dated 22.02.2017, wherein on similar circumstances, the Assessing Officer considered 10% interest free deposit as part of rental income on account of letting out of properties while computing ALV. The Coordinate Bench following the decisions of the Hon’ble Bombay High Court in the case of CIT Vs. Tip Top Typography (supra) and CIT Vs. JK Investors [248 ITR 723] held as under :

We have heard the rival submissions, perused the orders of the authorities below and find that this aspect of the matter has been considered by the ld. CIT (Appeals) and deleted the addition made towards notional interest while computing Annual Letting Value observing as under : “9.1 During the course of appellate proceedings, the Authorised Representative relied on the following case laws wherein it has been held that no addition can be made to the annual value on the basis of notional interest on interest free security deposit: i) CIT Vs. Tip Top Typography (2014) 48 taxmann.com 191 (Bom.) ii) CIT Vs. Moni Kumar Subba [2011] 10 taxmann.com 195 (Delhi) (FB) iii) CIT Vs. Satya Co. Ltd (1994) 75 Taxman 193 (Cal.) iii) CIT Vs. J K Investors (Bombay) Ltd (2000) 248 ITR 723 (Bom.) 9.2 I have considered the submission of the Authorised Representative and the order of the Assessing Officer as well as the case laws cited by the Authorised Representative. It is seen that the total rental income received by the assessee in respect of the impugned properties is Rs.1,16,10,000/- per annum and the assessee has received interest free security deposit of Rs.72,00,000/-. From these figures, it is clear that the amount of security deposit is not disproportionately higher compared to the rent received by the assessee. It is equivalent of approx 7.5 months rent, which is not abnormal considering the general market practice of taking 6-9 months rent as security deposit. It is settled law that the notional interest on the interest free deposit cannot be added to the rental income unless it is demonstrated that the security deposit was taken as a colourable device to reduce the rent and the incidence of tax hands of the assessee. In cases where the security deposit is abnormally high i.e. many times the rental income, because of which the rental fixed is abnormally low, such a decision could be justified. However, in the present case, since the security deposit is not out of proportion of the rental income and it is not the allegation of the Assessing Officer that due to the security deposit the rental fixed has been lowered with a view to decrease the incidence of tax, adding notional interest on such interest free deposit, cannot be justified. The case laws cited by 5 3318, 3596/Mum/2015 (A.Ys 2006-07, 2002-03 and 2002-03 resply.) M/s Bombay Sealink Builders Pvt. Ltd. the Authorised Representative also support this view. In view of the facts of the case, mechanically adding notional interest @10% on security deposit is therefore not justified and is hereby directed to be deleted. Ground of Appeal No.6 is therefore allowed.” Further the Hon’ble Bombay High Court in the case of JK Investors (supra) held that section 23(1)(b) of the I.T. Act provides that when actual rent received is more than the fair rent the actual rent would be the annual value and therefore the notional interest would not form part of actual rent received or receivable under section 23(1)(b) of I.T.Act. Therefore respectfully following the decision of the jurisdictional High Court we hold that notional interest should not form part of annual value. This ground of the revenue is rejected. “ Respectfully following the said decisions, we affirm the order of the Ld. CIT (Appeals) on this issue. Grounds raised by the Revenue are dismissed.

The Ld. DR submits that in the Assessee’s own case, the matter has been remanded to the Assessing Officer in the appeals for the assessment years 2006-07 and 2002-03 against the original assessments made u/s 143 (3).

We have heard the rival submissions, perused the orders of the authorities below. We also find from the order of the Coordinate Bench in Assessee’s own case in & 3552/Mum/2009 for the assessment years 2002-03 & 2006-07 that this issue has been restored back to the file of the Assessing Officer for necessary verification and deciding the issue afresh observing as under : “2.2 The second dispute which is relevant for all the four years is regarding allowability of deduction on account of society charges paid by the assessee to the society. The authorities below had disallowed the same holding that there was no business in existence and therefore the expenses could not be allowed. Aggrieved by the decision of the CIT(A), the assessee is in appeal before the tribunal. 2.2.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding allowability of expenditure on account of maintenance charges paid by the assessee to society as an owner of the flat in the society. We have already held that the rental income from flat has to be assessed as income from house property. The income under the head "house property" is assessed in respect of bonafide letting out value of the 7 3318, 3596/Mum/2015 (A.Ys 2006-07, 2002-03 and 2002-03 resply.) M/s Bombay Sealink Builders Pvt. Ltd. property and not any income from any other services. Therefore in case, as per the agreement, rent fixed between the parties also includes charges for any services rendered by the society, such charges included in the rent have to be excluded and only the part of the rent relating to the letting out of the property has to be assessed as house property income. In this case it is not clear whether the rent received by the assessee also included charges for common services provided by the society. The matter therefore requires verification. We accordingly set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary verification and after allowing opportunity of hearing to the assessee.” Respectfully following the said decision of the Coordinate Bench, we restore this issue to the file of the Assessing Officer for fresh adjudication in accordance with law.

In the result, appeal of the Assessee is allowed for statistical purpose and Revenue’s appeals are dismissed.