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| DATE: | January 4, 2011 (Date of publication) |
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| Click here to download the judgement (reclamation_annual_value_notional_interest.pdf) |
For s. 23(1)(a) only municipal valuation has to be taken. Notional Interest on deposit not includible in “Annual Value” u/s 23(1)(a) & 23(1)(b)
The assessee let out its premises at a rent of Rs. 2.87 crores per annum. The assessee also received a refundable interest free security deposit of Rs.2.60 crores. The assessee claimed that for s. 23(1)(a), “the sum for which the property might reasonably be expected to let from year to year” was the municipal valuation of Rs.27.50 lakhs while for s. 23(1)(b), the “actual rent received” was Rs. 2.87 crores and that the higher amount was the “annual value” of the property. The AO held that the municipal valuation did not reflect the true sum for which the property might reasonably be expected to let from year to year and that the rent received was low owing to interest-free deposit. He accordingly computed notional interest on the deposit and arrived at the annual value of Rs.3.42 crores for purposes of s. 23(1)(a). On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:
(i) In Circular 204 dated 24.7.1976, the CBDT has accepted that u/s 23(1)(a) the “sum for which the property might reasonably be expected to let from year to year” is the municipal valuation of the property. The same view that the Municipal valuation is the annual value u/s 23(1)(a) has been taken in CIT vs. Prabhabati Bansali 141 ITR 419 (Cal) & M.V. Sonavala vs. CIT 177 ITR 246 (Bom);
(ii) The contrary view in Makrupa Chemicals 108 ITD 95 (Mum) & Baker Technical Services (P) Ltd 126 TTJ (Mumbai)(TM) 455 that annual value determined by the Municipal authorities is not binding on the AO while determining the annual value u/s 23(1)(a) if it can be shown that the rateable value under the municipal laws does not represent the correct fair rent cannot be followed in view of M.V. Sonavala 177 ITR 246 (Bom) where it was held that the rateable value under the municipal law has to be adopted as annual value u/s 23(1)(a);
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