CIT vs. Moni Kumar Subba (Delhi High Court – Full Bench)

DATE: (Date of pronouncement)
DATE: April 6, 2011 (Date of publication)

Click here to download the judgement (moni_kumar_subba_notional_interest_ALV.pdf)

For Annual Value u/s 23, notional interest on deposit not includible. Municipal value is ordinarily ALV for s. 23 though AO entitled to depart for sufficient cause

The assessee let out house property for which she received a rent of Rs. 6.95 lakhs and an interest-free security deposit of Rs. 10.78 crores. The property was not subject to the Rent Control Act. The AO held that in computing the annual rent u/s 23(1)(a), the notional interest on the security deposit (Rs. 30.41 lakhs) had to be added. This was reversed by the CIT (A) & Tribunal. On appeal by the department, the matter was referred to a Full Bench. HELD by the Full Bench dismissing the appeal:

(i) S. 23 (1)(a) requires determination of the “fair rent” being “the sum for which the property might reasonably be expected to let from year to year”. The AO has to make an inquiry as to what would be the possible rent that the property might fetch. If he finds that the actual rent received is less than the “fair/market rent‟ because the assessee has received abnormally high interest free 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‟. S. 23(1)(a) does not mandate this;

(ii) The ALV fixed by the Municipal Authorities can be the basis of adopting the ALV for purposes of s. 23 because the provisions in the Delhi Municipal Corporation Act for fixing ALV are pari materia with s. 23. However, the AO can ignore the municipal valuation for determining the ALV if he finds that the same is not based on relevant material for determining the “fair rent” in the market and there is sufficient material on record for taking a different valuation;

(iii) In determining the reasonable/fair rent, extraneous circumstances may inflate/deflate the “fair rent”. Various circumstances can be taken into consideration by the AO while determining the fair rent though no particular test can be laid down and it would depend on facts of each case.

See Also DCIT vs. Reclamation Realty (ITAT Mumbai) where the law has been considered in detail

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