INCOME TAX APPELLATE TRIBUNAL,MUMBAI “J” BENCH

ITA No.2750/Mum/2012, Assessment Year-2004-05 ITA No.2481/Mum/2010, Assessment Year-2005-06
Mrs. Jyotsna K. Sheth (Appellant) vs. ACIT (Respondent)
Date of Order: 03-02-2016

ORDER
Order u/s. 254(1)of the Income-tax Act,1961

PER RAJENDRA, AM
Challenging the orders of the CIT(A)-,Mumbai the assessee has filed the appeals for the above mentioned two assessment years(AY.s.).As the issue involved is common in both the assessment years,so,we are adjudicating both the appeals by a common order.Details of filing returns, dates of assessment and assessed income etc.c an be summarised as under:

AY	ROI filed on	Returned Income (Rs.)	Assessment dt.	Assessed Income (Rs.)	Dt. of orders of CIT(A)
2004-05	14.09.2004	18425740/-	27.12.2006	20105740/-	23.02.2012
2005-06	03.08.2005	11065709/-	31.12.2007	10192380/-	10.12.2008

ITA/2750/Mum/2012,AY.-2004-05:

2. Effective ground of appeal is about the determination of the annual rental value of a house property let–out by the assessee.During the assessment proceedings,the Assessing Officer (AO) found that the assessee had let out, Flat No.4A in Manek Building,located at L.D. Ruparel Marg,to City Bank for a monthly rent of Rs.50, 000,that she had received an interest free deposit of Rs.3.5crores and bank guarantee of Rs.2.00 crores from the tenant.The AO carried out enquiry in respect of prevailing rent in the said building and found that a flat having less area fetched a rent upto an extent of Rs.3.5 lacs per months(Flat 2B), that another flat having less than 50% area(1265sq.ft.) of the assessee’s flat was let out for Rs.2.50 lacs per month.He made enquiries with the CPWD authorities and found that Government flats i.e. Hyderabad Estate were in the immediate vicinity of the building, that the CPWD was charging market price of Rs.69.70 per sq.ft. w.e.f. 1.12.2004 from the Government Officers as market rent. Finally,he adopted annual rental value of the Flat at Rs.2.5 lacs per month for the purpose of sec.23(1)(a) of the Act.

3.Aggrieved by the orders of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that rent was received as per the agreement entered into with the tenant and landlord, that the assessee had not received any extra amount from the tenant, that the rent disclosed by the assessee was the correct market rent and was a genuine transaction.

After considering assessment order and the submission of the of the assessee,the FAA held that the assessee had let out one flat and 2 garages in the basement, that flat was located in posh locality at Malabar Hill with full amenities, round the clock security, swimming pool, power back up for internal use, that flat No.2B having area of 2365sq.ft was let out for monthly rent of Rs.2.35lacs, that as per the leave and license agreement the assessee had to pay municipal taxes for the flat let out by her, that her family members stayed in same premises at Flat No.7B, that the area of flat No.7B was 2365sq.ft, that the assessee was paying Rs.1.48 lacs as municipal taxes per annum, that the area of let-out flat was more, that as a corollary Municipal taxes would also be high, that if the Municipal taxes paid by the assessee were considered, then the actual rent would be less that Rs.50,000/- per month..Finally, he held that rent disclosed by the assessee did not represent correct annual letting value, that the action taken by the AO was as per law.

4.Before us, the Authorised Representative (AR) stated that notional interest could not be made part of Annual Letting Value (ALV), that the provisions of section 23(1)(a) were very clear in that regard, that there was no finding in the assessment order about existence of extraneous circumstances, that the assessee had shown that reasonable ALV.She relied upon the cases of Reclamation Realty (ITA/1411- 12/Mum/2004 dt.26.11.2010) and the case of Tip Top Typography(368ITR330) of the Hon'ble Bombay High Court. The Departmental Representative (DR) contended that AO had made enquiries not only from the building but from the near by Govt. Colony, that the AO had made comparison and a detailed study about the rent received from the tenants in the same building, AO had given reasons for not accepting the claim made by the assessee, that he had also taken into consideration the higher rise of the building and other relevant facts while deciding the issue, that the AO was authorised to make enquiries and decide the ALV, that he had not added the notional interest to the income of the assessee, he stated that judgment of Tip Top (supra), supported the case of AO and that of the assessee.

5.We have heard the rival submissions and perused the material on record. Before proceeding further, we would like to deliberate upon the certain principles govern - ing taxation of house property income along with the relevant case laws.Hon’ble Delhi High Court(full bench),in the case of Moni Kumar Subba (333ITR38)has laid down following principles:

(i)    The annual letting value 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 consideration may take it out of the bounds of reasonableness.

(iii) Actual rent received in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration.

(iv) Such annual letting value, however, cannot exceed the standard rent under the rent control legislation applicable to the property.

(v)   If the standard rent has not been fixed by the Rent Controller, it is the duty of the AO to determine the standard rent according to the provisions of the rent control enactment.

(vi)  The standard rent is the upper limit, and if the fair rent is less than the standard rent, it is the fair rent which shall be taken as the annual letting value and not the standard rent.

(vii) The addition of notional interest on the interest-free security deposit to the rent agreed upon is not permissible in law.It is open to the assessing authority to take note of the amount of advance paid which gives an indication of the fair rent of the property that fetches in the market. But the interest accrued on such deposit cannot be added to the agreed rent,so as to make a fair rent or market rent.

We would also like to discuss cases of K.Streetlite Electric Corporation (336 ITR 348),delivered by the Hon’ble P & H High Court and it deals with the issue before us.Facts of the case were that the assessee was earned rental income from letting facilities of factory,land,building and offices, that it had taken interest-free security of Rs.35 lakhs from two parties to whom the assets were leased out,that it showed rental income of Rs.1.50 lakhs as annual letting value in respect of those properties,that there was no provision in the agreement for increase in rent from year to year,that the AO determined the annual value at Rs.7,80,000/- by adding notional interest of Rs.6,30,000/- calculated at the rate of 18% per annum on Rs.35 lakhs taken as security deposit to the value of Rs.1.50 lakhs shown by the assessee, that the FAA deleted the notional interest,that the Tribunal affirmed the order of the FAA.On further appeal,the Hon’ble court held as under:

“………the security deposit of Rs.35 lakhs which amounted to 140 times the monthly rent was disproportionate to the actual contractual rent of Rs.25,000 per month, i.e.,total Rs.12,500 per month for land and building, etc.and Rs.12,500 per month for furniture, fixtures,plant and machinery, etc. It had no rationale with the agreed rent and the assessee had adopted a device to circumvent its liability to tax. Further, the rent deed did not contain any provision for increase of rent from year to year. Moreover, the security deposit of Rs.35 lakhs where the value of the property let out was Rs. 17.62 lakhs, plant and machinery of Rs.1.69 lakhs and furniture of Rs.48,673/-could not be held to be justified as a genuine transaction.Therefore,the security deposit was a sham device to avoid tax and had no real basis with the actual rent that was received by the assessee. According to section 23(1)(b) of the Act where the property was actually let out, the actual amount of rent received or receivable would form part of the income from house property. Ordinarily, the notional interest that may accrue on the security deposit would not form part of income from house property. However, where payment of the security deposit was to circumvent liability to tax on the real rent, it would fall within the ambit of income from house property. Therefore the interest on the security deposit amount of Rs. 35 lakhs would be treated as income of the assessee.Interest at the rate of 9 per cent. per annum on the security amount of Rs.35 lakhs would be just to meet the ends of justice and it would be treated as taxable income of the assessee under the head Income from house property’relating to the land and building.”

From the above discussion,it is clear that addition of notional interest on the interest-free security deposit to the rent agreed upon is not permissible in law.It is open to the assessing authority to take note of the amount of advance paid which gives an indication of the fair rent which the property fetches in the market . But,the interest accrued on such deposit cannot be added to the agreed rent,so as to make a fair rent or market rent for purposes of determining the annual value u/s.23 of the Act.In short, inflated or deflated rental income can be corrected by the AO considering various relevant factor-one of such factors is interest accrued to interest free security deposit.

A perusal of the assessment order reveals that the AO examined the cost of assets leased and the adequacy of the rent in comparison to its value.He held that the interest free deposit of Rs.3.5Crores was in lieu of rent which was not offered for taxation by the assessee.The comparative market rates were gathered and the applicability of section 23(1)(a) was also examined.We find that the property was purchased in 1992 for Rs.2.57 Crores,that the assessee had accepted interest free deposit of Rs.3.5 Crores and Bank guarantee of Rs.2 Crores,that monthly rent was fixed at Rs.50,000/-,,that the area of the flat was 2700 sq.feet,that the along with the flat two garages in the basement were also let out to the tetnan,that the assessee did not charge anything for the garages,that the assessee was paying municipal taxes of Rs.1.48 lakhs per year for the flat occupied by her namely flat no.7B in the same premises,that the area of that flat was 2365 sq.feet,that area of let out flat was more than the flat no. 7B,that if the payment of municipal taxes by the assessee is also taken in to consideration,the effective monthly rent would be less than Rs.50,000/-per month, that the AO found that in the same building other flats were let out for very high rents as compared to the rent received by the assessee,that the market rates fixed by the CPWD for the nearby Government flats was also considered by the AO,that he had not added the interest of deposit to the annual value of the property,that he considered various factors and held that the rental income shown by the assessee was not as per the market value.As the AO and the FAA had followed the judgment of Hon’ble Bombay High Court,delivered in the case of J K Investors(supra)and have not added the interest income to the notional rental income of the assessee for the year under consideration,so,in our opinion, there is no factual or legal error in their orders.Considering the peculiar facts and circumstances of the case,we hold that it is a clear cut case of deflated rent and that the FAA had rightly dismissed the appeal filed by the assessee.Therefore, upholding his order we decide the effective ground of appeal against the assessee.

We would like to mention that in the case of Reclamation Reality(supra)the facts were totally different.In that matter,the AO had not made any inquiry and had considered the notional interest of deposit for arriving at ALV.In the case before us,the AO made proper inquiries and had confronted the assessee with his findings. Only after that,he determined the reasonable rent.In the case of Tip Top Typography (supra) the Hon’ble High Court of Bombay has endorsed the principal that in certain circumstances,the AO,while determining the ALV,can take in to consideration the interest free deposit,but he should follow a procedure laid down by law.

ITA/2481/Mum/2010-AY.2005-06:

6. Following our order for the earlier AY., we decide the appeal for the year under consideration against the assessee.

As a result, appeal filed by the assessee for both the AY.s. stand dismissed.

(Ram Lal Negi))                        (RAJENDRA)
JUDICIAL MEMBER                ACCOUNTANT MEMBER