Notional benefit will not form part of actual rent received as contemplated by section 23(1)(b) of IT Act
SUMMARY OF CASE LAW
Section 23(1)(b) gives limited power to the Assessing Officer to examine whether rent received is more than the reasonable rent under section 23(1)(a).
CASE LAW DETAILS
Decided by:. ITAT, MUMBAI BENCH `C’ MUMBAI
In The case of: ITO v. Pushya Properties (P.) Ltd.
Appeal No. : ITA No. 2906/m/08
Decided on: March 6, 2009
5.11 Now coming to the merits of the case. For this purposes, we are required to consider the scheme of taxation of income from house property. Section 22 says that the measure of income from house property is its annual value. The annual value is to be decided in accordance with section 23. Sub-section (1) of section 23, by virtue of the amendment with effect from the assessment year 1976-77, has two limbs, namely, clauses (a) and (b). Clause (a) states that the annual value is the sum for which the property might reasonably be expected to be let frorr year to year. Clause (b) covers a case where the property is let snd the actual rent is in excess of the sum for-A’hic’a the property might reason ably be expected to be let from year to year. In other words, insertion of clause (b) by the Taxation Laws (Amendment) Act, 1975, covers a case where the rent for a year actually received by the owner is in excess of the lawful rent which is known as the fair rent or standard rent under the rent control legislation. The provisions of section 23(1 )(a) of the Income-tax Act apply both to owner-occupied property as also to property which is let out and the measure of valuation to decide the annual value is the standard rent or the fair rent. However, section 23(1)(b) only applies to cases where the actual rent received is more than the reasonable rent under section 23(1)(a) of the Act and it is for this reason that section 23(1)(b) contemplates that in such cases the annual value should be decided on the basis of the actual rent received Generally, the fair rent is fixed even under the B.M.C. Act and the Rent Act by taking into account various principles of valuation, viz., the contractors’ method, the rent method, etc. However, that exercise is undertaken to decide the fair rent of the property. In that connection, the actual rent received also provides a piece of evidence to decide the fair rent of the property. However, under the Income-tax Act, the scheme is slightly different. Section 23(1 )(b) provides that where the actual rent is more than the fair rent, the actual rent would be the annual value of the property. In the circumstances, the value of the notional advantage, like notional interest in this case, will not form part of the actual rent received as contemplated by section 23(1)(b) of the Act. At the cost of repetition it may be mentioned that under section 23(1)(a), the Assessing Officer has to decide the fair rent of the property. While deciding the fair rent, various factors could be taken into account. In such cases various methods like the contractors’ method could be taken into account. If on comparison of the fair rent with the actual rent received, the Assessing Officer finds that the actual rent received is more than the fair rent determinable as above, then the actual rent shall constitute the annual -value under section 23(1)(b) of the Act.
5.12 Now, applying the above test to the facts of this case, though the Assessing Officer has mentioned section 23(1 )(a) in his order but his working of annual value is on the basis of section 23(1 )(b).Because in the case under consideration the assessee received actual rent. Section 23(1)(b) clearly provides that where the property or any part of the property is let and the actual received or receivable is in excess of the sum referred to in clause (a). Section 23(1 )(b) gives limited power to the Assessing Officer to examine whether rent received is more than the reasonable rent under section 23(1)(a). The Assessing Officer is to find out annual rent u/s 23(1)(a) and then simply compare whether the actual rent received is more than the amount calculated by the Assessing Officer u/s 23(1 )(a), then only actual received is to be taken. But in the case under consideration the Assessing Officer has enhanced the actual rent received by making 10% addition of the interest free amount received to the actual rent received. Thus we find that merely by mentioning section 23(1)(a) by the Assessing Officer, it cannot be held that section 23(1)(a) has been invoked. In fact the Assessing Officer has invoked section 23 (b) of the Act. This action of the Assessing Officer is contrary to the judgment of the jurisdictiona! High Court in the case of CIT V.J.K. Investors (Bom.) Ltd. 248 ITR 723 (Bom.), against which SLP filed by the Department has been rejected by the Apex Court vide petition(s) for Special Leave to Appeal (Civil) CC 5480/2001 dated 01.11.2002. The question for consideration before jurisdictional High Court was whether notional interest would form part of the actual rent received or receivable u/s 23(1 )(b).The facts giving rise to that case, briefly, are that The assessee, during, the previous year, relevant to the assessment year 1992-93, purchased premises in the building known as “Mahendra Towers” vide sale, deed dated June 28, 1991. The said premises wore let out to Raymond Woollen Mills Limited from October 1, 1991. The lessee agreed to deposit an amount as a security deposit for the due performance of the lease. The assessee was not to pay any interest on the security deposit to the lessees. The premises are covered by the provisions of the Bombay Rent Act, 1947. The Assessing Officer concluded that the annual value of the property under section 23(1)(b) was the sum total of the rent actually received by the assessee as lessor plus notional interest for the interest-free deposit made by the lessee. The Assessing Officer calculated the notional interest at the rate of 21.5 percent per annum, i.e., at the rate at which the assessee borrowed funds. The jurisdictional High Court held that when actual rent received by assessee was more than the fair rent of the house property section 23(1)(b) is invoked, notional interest on deposit could not be taken into account for determining annual value. Since the action of the Assessing Officer contrary to the judgment of jurisdictional high Court, therefore, same is liable to quash.