Tivoli Investment and Trading Co vs. ACIT (ITAT Mumbai)

For s. 23(1)(a) ALV, AO not bound by standard rent/ rateble value & can adjust if interest-free deposit reason for low actual rent

The assessee let out its property to Citibank under a leave & license agreement pursuant to which Citibank gave it an interest-free security deposit of Rs.1.54 crores. No rent was payable though Citbank reimbursed the actual maintenance charges of Rs.9825 pm levied by the society. This reimbursement was offered by the assessee as rent. The AO determined the ALV by taking it at 15% of the interest-free security deposit. On appeal for an earlier year, the Tribunal (90 ITD 163) upheld the AO’s stand on the ground that though no addition was possible with reference to the notional interest on the deposit, as no rent was paid and in lieu of that rent excessive deposit was received, the “usufructus of the deposit” could be considered as rent. Subsequently, for the present year, as the earlier decision of the Tribunal was doubted, the matter was referred to a Special Bench which was subsequently withdrawn as the matter was pending before the High Court. Pursuant thereto, HELD

(a) For determining the ALV u/s 23(1)(a), the AO has to determine the fair/ reasonable rent expected to be fetched by the property. If the property is governed by the Rent Control Act, the standard rent is one of the various factors to be taken into account by the AO. However, the municipal value or standard rent is not binding on the AO but is a guiding factor for determining the reasonable rent expected to be fetched by the property. If the AO finds that the Municipal Value is not based on relevant material for determining fair rent in the market and there is a sufficient material on record for taking different valuation, the AO can determine the fair rent by inflating or deflecting the Municipal Value or Standard Rent. If the AO finds that the actual rent received is less than the fair market rent because of the abnormally high interest-free security deposit, he can undertake necessary exercise in that behalf. However, the notional interest on interest free security cannot be taken as determinative factor to arrive at fair rent;

(b) On facts, as the AO had not made any inquiry to determine the fair rent u/s 23(1)(a), matter remanded.