|DATE:||(Date of pronouncement)|
|DATE:||October 20, 2010 (Date of publication)|
|Click here to download the judgement (moni_subba_notional_interest_rent.pdf)|
Q whether notional interest on interest-free security deposit is includible in ‘house property’ income referred to Full Bench
The assessee let out property on a rent of Rs. 90,000 per month and also received interest-free security deposit of Rs. 8.58 crores. The property was not subject to the Rent Control Act. The assessee claimed that only the rent could be taken into account for determining the ‘annual value’ of the property and not the notional interest on the deposit. The AO determined the ‘annual value’ u/s 23(1)(a) by adding Rs. 30 lakhs of notional interest. The CIT (A) and Tribunal deleted the addition by holding that the rateable value as determined by the MCD had to be taken as the “fair rent” u/s 23(1) (a) and the notional interest could not be added either u/s 23(1)(a) or u/s 23(1)(b). On appeal by the department HELD:
(i) Though in J. K. Investors 248 ITR 723 (Bom), it was held that notional interest could not be considered for s. 23(1)(b), the question with regard to s. 23(1)(a) was left open. Also, the property there was covered by the Rent Control Act. In Satya Co. Ltd 140 CTR (Cal) 569 it was held that the fair rent fixed under the municipal law takes into consideration everything and it is not permissible to add the notional interest either u/s 23(1)(a) or u/s 23(1)(b). In Asian Hotels 215 CTR (Del) 84 it was held that notional interest could not be included u/s 23(1)(a);
(ii) However, the moot question is that when it is found that such rateable value fixed by the Municipal authorities may not represent the correct value, would that still be taken as a yardstick for s. 23(1)(a). The huge interest-free deposit of Rs. 8.58 crores does not appeal to reason when the rent is a meager amount of Rs. 90,000 per month. The AO might ultimately form an opinion that there would be reasonable expectation that the property would fetch higher rent than the contractual rent, even when the contractual rent is more than the annual value fixed by the MCD. The question would be as to whether in such circumstances, he may ignore the annual value fixed by the Municipal authorities and come to a conclusion that the property would reasonably fetch a rent, which is more than the actual rent received? To put it otherwise, can the AO, in such circumstances, take into consideration the notional interest to arrive at the same which the property might reasonably be accepted to let for year to year? If so, the next question would be whether it can be done in all cases or in some glaring cases like the present one where security deposit is not equivalent to six months to three years of rent but completely disproportionate to the actual contractual rent? Even if the notional interest is not to be added, can such a huge interest free security deposit (which does not appear to have any rationale with the agreed rent) be totally ignored while determining the “fair rent” which the property might reasonably be expected to yield? Or else, in a case like this, can it be inferred that the tenant paid part rent by giving interest-free deposit and agreed rent is not what reflected in the lease deed, but part of it is hidden in the form of security?
(iii) These aspects were not considered in the earlier judgements as such abnormal circumstances did not exist in those cases. The issue should accordingly be referred to the Full Bench to consider the aspects touching the interpretation that needs to be given to s. 23(1) (a).