Bombay H.C : Whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling under s. 23(1)(b) of the IT Act, 1961 (‘the Act’) ? In other words, whether notional interest would form part of actual rent received or receivable under s. 23(1)(b) ?

Counsel Appeared

R.V. Desai & J.P. Deodhar, for the Appellant : S.E. Dastur with Zal Andhyarujina, C.N. Mehta, Mohan Salian & Carlo D’ Silva i/b Gagrat & Co., for the Respondent

JUDGMENT

S.H. KAPADIA, J.:

The short point which arises for consideration in this appeal is : Whether notional interest on interest-free deposit received by the assessee against letting of property could be taken into account in cases falling under s. 23(1)(b) of the IT Act, 1961 (‘the Act’) ? In other words, whether notional interest would form part of actual rent received or receivable under s. 23(1)(b) ? The facts giving rise to this appeal briefly, are as follows : The assessee, during the previous year, relevant to the asst. yr. 1992-93, purchased premises in the building known as ‘Mahendra Towers’ vide sale deed dt. 28th June, 1991. The said premises were let out to Raymond Woollen Mills Ltd. from 1st Oct., 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 AO concluded that the annual value of the property under s. 23(1)(b) was the sum total of the rent actually received by the assessee as lessor plus notional interest for interest- free deposit made by the lessee. The AO calculated the notional interest at the rate of 21.5 per cent per annum, i.e., at the rate at which the assessee borrowed funds. The above order of the AO was confirmed in appeal by the CIT(A). Being aggrieved, the assessee carried the matter in appeal to the Tribunal. In the impugned judgment, the Tribunal observed that the real issue was not the annual value of the property under s. 23(1)(a), but the real issue was as to what constituted rent for the purposes of s. 23(1)(b). On the facts, the Tribunal found that the actual rent received by the assessee, even without taking into account the notional interest, was more than the annual value determinable under s. 23(1)(a) of the Act and it is for this reason that the Department invoked only s. 23(1)(b) of the Act. The Tribunal concluded that s. 23(1)(b) only applied to cases of actual rent being received by the assessee and that the said section does not apply to cases falling under s. 23(1)(a) which permits adoption of notional value as annual letting value of the property. Hence, the Tribunal allowed the appeal. The Tribunal held that notional interest cannot be taken into account under s. 23(1)(b). Being aggrieved, the Department has come in appeal under s. 260A of the IT Act.

At the outset it may be pointed out that this judgment is based only on the facts of the present case. At the outset it may be mentioned that the Department has invoked s. 23(1)(b) which is not in dispute. The Department has not invoked s. 23(1)(a) of the Act. The property is covered by the provisions of the Bombay Rent Act. The Tribunal has given a finding of fact that the actual rent received by the assessee even without taking into account the notional interest was more than the annual letting value of the property determinable under s. 23(1)(a) of the Act. It is in this factual background that we are required to consider the scope of s. 23(1)(b). In the case of CIT vs. Satya Co. Ltd. (1994) 75 Taxman 193 (Cal), the Division Bench of the Calcutta High Court has held that when the annual value is decided under s. 23(1)(a) of the IT Act with reference to the fair rent, than the said fair rent takes into consideration everything. However, under s. 23(1)(b), only the actual rent received or receivable can be taken into consideration and not any notional advantage. Similarly, in the case of CIT vs. M. Ratanchand Chordia(1997) 139 CTR (Mad) 191 : (1997) 228 ITR 626 (Mad) : TC S40.3572, it has been held by the Madras High Court that in cases of s. 23(1) (b), the annual value shall be determined only on the basis of actual rent received. In this matter, we are required to consider the scheme of taxation of income from house property. Sec. 22 says that the measure of income from house property is its annual value. The annual value is to be decided in accordance with s. 23. Sub-s. (1) of s. 23, by virtue of the amendment with effect from the asst. yr. 1976-77, has two limbs,namely, cls. (a) and (b). Clause (a) states that the annual value is the sum for which the property might reasonably be expected to be let from year to year. Clause (b) covers a case where the property is let and the actual rent is in excess of the sum for which the property might reasonable be expected to be let from year to year. In other words, insertion of cl. (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 provision of s. 23(1) (a) of the IT 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, s. 23(1)(b) only applies to cases where the actual rent received is more than the reasonable rent under s. 23(1)(a) and it is for this reason that s. 23(1)(b) contemplates that in such cases the annual value should be decided on the basis of the actual rent received. As stated hereinabove, in this case, the Department has invoked s. 23(1)(b) which, as stated hereinabove, proceeds on the basis that the actual rent received by the assessee is more than the reasonable rent under s. 23(1) (a).

The Tribunal has also found that the actual rent received by the assessee, even without taking into account the notional interest, was more than the annual value determinable under s. 23(1)(a) of the Act. This finding of fact has not been challenged by the Department in this appeal. On the contrary, the Department has contended that in this case s. 23(1)(b) was applicable. They have not relied on the provisions of s. 23(1)(a). The question as to whether notional interest could have been taken into account under s. 23(1)(a) does not arise in this appeal and we do not wish to go into that question in this appeal. However, the moot point which needs to be considered in this case is whether notional interest could form part of the actual rent received by the assessee under s. 23(1)(b) of the IT Act. It is important to note that the property is covered by the provisions of the Bombay Rent Act. The scheme of s. 23(1)(b), in contradistinction to s. 23(1)(a), shows that fair rent is the basis to determine the annual value of a property. This was the sole basis prior to the asst. yr. 1975-76. However, after the amendment of s. 23(1) by the Taxation Laws (Amendment) Act, 1975, the legislature has clearly laid down under s. 23(1)(b) that when the actual annual rent received or receivable is in excess of the fair rent determinable under s. 23(1) (a), then such higher actual annual rent would constitute the annual value of the property. It is important to bear in mind that under s. 22, the measure of income from house property is its annual value. The annual value is to be decided in accordance with s. 23(1). By virtue of the amendment, cl. (a) states that annual value is the sum for which the property might reasonably be expected to be let from year to year whereas cl. (b) covers a case where the property is let and the actual rent is in excess of the sum for which the property might reasonably be expected to be let from year to year. In our view, this later insertion of cl. (b) by the Taxation Laws (Amendment) Act, 1975 is meant to cover a case where the rent per annum actually received by the owner is in excess of the fair rent or the standard rent under the rent control legislation. Now, in this case, the Department has invoked s. 23(1)(b). Now, in this case, it has been found that the actual rent received by the assessee is more than the fair rent even without taking into account notional interest. 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., contractor’s 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 by the lessor also provides a piece of evidence to decide the fair rent of the property. However, under the IT Act, the scheme is slightly different. Sec. 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 actual rent received as contemplated by s. 23(1)(b). At the cost of repetition it may be mentioned that under s. 23(1)(a), the AO 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 contractors’ method could be taken into account. If on comparison of the fair rent with the actual rent received, the AO finds that the actual rent received is more than the fair rent determinable as above, then actual rent shall constitute the annual value under s. 23(1)(b). Now, applying the above test to the facts of this case, we find a categorical finding of fact recorded by the Tribunal that the actual rent received by the assessee was more than the fair rent. Under the above circumstances, in view of the said finding of fact, we do not see any reason to interfere.

Before concluding we may point out that under s. 23(1)(b), the word ‘receivable’ denotes payment of actual annual rent to the assessee. However, if in a given year a portion of the actual annual rent is in arrears, it would still come within s. 23(1)(b) and it is for this reason that the word ‘receivable’ must be read in the context of the word ‘received’ in s. 23(1)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by s. 23 (1)(b). We once again repeat that whether such notional interest could form part of the fair rent under s. 23(1)(a), is expressly left open. For the above reasons, the appeal was dismissed.

[Citation : 248 ITR 723]