DCIT vs Rita A. Parekh
Citation 2006 10 SOT 779
 
AY 1998-99. The assessee was a co-owner of a property that was let out on leave and licence basis against a monthly compensation of Rs.20,000 per month and an interest free security deposit of Rs.50 lakhs. The certificate of an estate broker filed by the assessee clearly stated that the monthly rent of the property could be Rs.80,000 per month if the security deposit of Rs.50 lakhs was not received. Therefore, as per the certificate, the AO was justified in computing the annual letting value of the property at Rs.80,000 per month.

S.23(1)(a) of the Income Tax Act 1961 

ITAT, Mumbai

DCIT vs Rita A. Parekh

IT Appeal No. 369 (Mum.) of 2003, Assessment Year 1998-99

Sunil Kumar Yadav, J.M and A.K. Garodia, A.M

13 March 2006

Durgesh Sumrott for the Appellant
Dalpat Shah for the Respondent

ORDER

Sunil Kumar Yadav, Judicial Member. - This appeal by the revenue is directed against the order of the CIT(A) on a solitary ground that CIT(A) has erred in directing the Assessing Officer to compute the ALV of the flat in question on the basis of actual rent received/receivable under section 23(1)(b) which is higher than the municipal ratable value and in further directing to recompute the statutory deductions admissible under section 24 of the Act and thereby withdrawn the excess deduction granted.

2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.

3. The facts borne out from the record are that the assessee is a co-owner of Flat No. 9 B-1, Great Eastern Royale Co-op. Housing Society along with her mother Smt. Ashwinaben Choksey, having 50% shares each. During this year, the said flat was given on leave and license basis to a Bank against monthly compensation of Rs. 20,000 p.m. from 25-12-1997 to March, 1998 and an interest-free security deposit of Rs. 50 lakhs. During the course of assessment proceedings, assessee was asked as to why the interest element on the interest-free security deposit should not be taken into consideration for determining the correct annual value of the property under the head "Income from house property". The assessee has objected to the same contending that there is no provisions in the Act for adding notional rent. He placed reliance upon the Judgment of the Bombay High Court in the case of CIT v. J.K. Investors (Bombay) Ltd. [2000] 112 Taxman 107 and CITv. Sampathammal Chordia [1999] 105 Taxman 128 (Mad.). The Assessing Officer examined the issue in the light of aforesaid judgments and provisions of section 23 of the Act and after relying upon the certificate of broker M/s. Knight and Frank wherein it has been stated that the flat could be let for a license fee of about Rs. 80,000 p.m. if no security deposit is considered. The Assessing Officer has estimated the ALV of the flat at Rs. 80,000 p.m. in which assessee's share comes to Rs. 40,000 p.m. While doing so, the Assessing Officer has also taken into account the interest earned by the assessee on the security deposits.

4. Assessee preferred an appeal before the CIT(A) and reiterated its contention. The CIT(A) re-examined the issue and being convinced with the explanation of the assessee, has directed the Assessing Officer to compute the ALV of the flat in question on the basis of actual rent received which is higher than the rateable value of the flat.

5. Now the Revenue has preferred an appeal before the Tribunal with the submissions that while estimating the ALV of the property, the Assessing Officer has adopted the rent to be fetched by the property if let out on the basis of the certificate of a broker M/s. Knight and Frank, filed by the assessee during the course of assessment proceedings. The rateable value determined by the municipality cannot form a basis for determining of the ALV under section 23(1)(a) of the Income-tax Act. The rateable value of the municipality can only be used to determine a house tax/property tax of a property. But, the ALV is to be worked out as per section 23(1)(a) of the Income-tax Act, according to which, the ALV of the property, shall be deemed to be the same for which property might reasonably be expected to let from year to year or where the property is let and annual rent received or receivable by the owner in respect thereof, is in excess of the same referred to in clause (a) amounts so received or receivable. Meaning thereby, in order to determine the ALV of a property, one has to find out on what rent the property can be let out from year to year. If the expected rent is lesser than the annual actual rent, the actual rent shall be deemed to be the ALV of the property. But, in the instant case, the property was let out for a sum of Rs. 20,000 p.m. Besides, the tenant has made interest-free security deposit of Rs. 50 lakhs. During the course of hearing, assessee himself has filed a letter of Estate Broker M/s. Knight and Frank wherein it has been stated that the flat could be let for a license fee of about Rs. 80,000 p.m. if no security deposit is considered. Meaning thereby, the impugned property can fetch a rent of Rs. 80,000 p.m. if it is let in the open market. The learned DR further contended that the Bombay Rent Control Act is not applicable to the instant case, as such, the standard rent cannot be determined. In these circumstances, the only course left with the authorities to consider the market annual rent which could reasonably expected on letting of the impugned property, which according to the assessee's evidence is of Rs. 80,000 per month. In these circumstances, the ALV taken by the Assessing Officer as Rs. 80,000 p.m. is not unreasonable. Assessing Officer has not added the notional interest to the rent received by the assessee. He has simply kept in mind the notional interest to be earned on the interest-free deposits while estimating the ALV. The learned DR further placed reliance upon the order of the Tribunal in the case of Fizz Drinks Ltd. v. Dy. CIT [2005] 95 TTJ (Delhi) 429 in which the Tribunal held that if the assessee having fixed meagre rent but having received large interest-free security deposit, annual letting value has to be determined in accordance with section 23(1)(a) by taking into account notional interest on the amount of security deposit calculated @ 15% per annum. In the case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 their Lordship of the Apex Court have ruled that it is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties. The learned DR also placed reliance upon the order of the Tribunal Bombay Bench in the case of Tivoli Investment and Trading Co. (P.) Ltd. v. Asstt. CIT[2004] 90 ITD 163 (Mum.).

6. The learned counsel for the assessee besides reiterating its contentions raised earlier, has invited our attention to the copy of leave and license to prove that property was let out at a monthly rent of Rs. 20,000 p.m. He further invited our attention to the Judgment of the Bombay High Court in the case of J.K. Investors (Bombay) Ltd. (supra) in which it has been held that the notional interest on interest-free deposit received from lessee would not form part of actual rent under section 23(1)(i) of the Income-tax Act.

7. Having heard the rival submissions and from a careful perusal of the orders of the lower authorities and documents placed on record, we find that admittedly assessee and his mother have jointly let out the impugned property for Rs. 20,000 p.m., to the Bank through leave and license agreement dated 12th December, 1997. While letting the property, assessee and his mother have also taken an interest-free security deposit of Rs. 50 lakhs as per the leave and license agreement. During the course of hearing, assessee himself has filed a certificate of a broker in which it has been stated that the flat could be let for a license fee of Rs. 80,000 p.m. if no security deposit is considered. Meaning thereby, this property can fetch a monthly rent of Rs. 80,000 if it is let in the open market. According to section 23(1), ALV shall be deemed to be the same for which the property might reasonably be expected to let from year to year and if the accepted amount is lesser than the actual rent received or receivable by the assessee, then the actual rent would be the ALV of the property. But, in the instant case, as per the certificate of the broker, property can reasonably be expected to let @ Rs. 80,000 per month which is more than the actual rent received by the assessee. It is also an admitted position in the instant case that the Assessing Officer has adopted the monthly rent of the property at Rs. 80,000 p.m. in order to determining the ALV of the property on the basis of evidence filed by the assessee. From a careful perusal of the orders of the Assessing Officer, we do not find anywhere that he has added the notional interest to the annual rent of the property. He has simply kept in mind that the interest-free security deposits and the interest accrued thereon while determining the monthly rent of the property. We have also carefully examined the order of the Tribunal Delhi Bench in the case of Fizz Drinks Ltd. (supra) in which the Tribunal has categorically held that if the assessee having fixed meagre rent but having received large interest-free security deposit, annual letting value has to be determined in accordance with section 23(1)(a) by taking into account notional interest on the amount of security deposit calculated @ 15% per annum. The revenue authorities cannot remain oblivious to the fact that substantial amount was taken as interest-free security deposit at the time of letting of the property, while computing the ALV of the property. It has been categorically held by the Apex Court in the case of Panbari Tea Co. Ltd. (supra), that it is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties. In the case of Tivoli Investment and Trading Co. (P.) Ltd. (supra), the Tribunal has examined the scope of provisions of section 23 of the Income-tax Act and held that section 23(1)(a) provides that for the purpose of section 22, the annual value of any property shall be deemed to be the same for which property might reasonably be expected to be let from year to year. It is, pertinent to note that the word used is "might" and not "can" or "is". It is thus a notional income to be gathered from what a hypothetical tenant would pay which is to be objectively ascertained on a reasonable basis irrespective of the fact whether the property is let out or not. We have also examined the Judgment of the Apex Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 in which their Lordships have held that it is the value of the property to the owner which is to be taken as the standard for making assessment of the annual value. The criterion is the rent realizable by the landlord and not the value of the holding in the hands or tenant. The rent which the land lord might realize if the buildings were let is made the basis for fixing the annual value of the building. The word "reasonably" in the definition is very important. What the landlord might reasonably expect to get from a hypothetical tenant, if the building were let from year to year, affords the statutory yardstick for determining the annual value. In this case their Lordships have finally held that the annual value of the building whether let out or self-occupied governed by the Rent Control Act must be limited by the measure of a standard rent determinable under the Act. Following the Judgment of the Apex Court, the ALV is being determining on the basis of the standard rent to be fixed under the particular Rent Control Act. But, whenever, Rent Control Act is not applicable to the properties, the ALV can be worked out after taking into the surrounding circumstances and the rent which the landlord might realize if the building is let in an ordinary course without taking interest-free security deposits. In the instant case, since the evidence is filed by the assessee itself speaks that this property can fetch rent at Rs. 80,000 p.m., the Assessing Officer has rightly adopted the same to determine the ALV of the property. We, therefore, do not find any infirmity in the assessment order. Accordingly, we, set aside the order of the CIT(A) and restore that of the Assessing Officer.

8. In the result, appeal of the Revenue is allowed.