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Commissioner Of Income-Tax v. J.K Investors (Bombay) Ltd.
Judgment Summary — S.H. Kapadia, J.
Factual and Procedural Background
The assessee purchased premises in "Mahendra Towers" by sale deed dated 28 June 1991 and let the premises to Raymond Woollen Mills Limited from 1 October 1991. The lease required the lessee to pay a security deposit but expressly provided that the assessee would not pay any interest on that deposit. The premises are subject to the Bombay Rent Act.
The Assessing Officer determined the annual value under section 23(1)(b) of the Income-Tax Act by adding notional interest on the interest-free security deposit to the rent actually received. The Assessing Officer calculated notional interest at 21.5% per annum (the rate at which the assessee borrowed funds). The Commissioner of Income-Tax (Appeals) confirmed that decision. The assessee appealed to the Tribunal, which found as a fact that the actual rent (without including notional interest) exceeded the annual value determinable under section 23(1)(a), and held that notional interest could not be taken into account under section 23(1)(b). The Department obtained special leave to appeal (appeal under section 260A).
The Court emphasised at the outset that its judgment is based on the facts of the present case and noted that the Department relied on section 23(1)(b) and did not invoke section 23(1)(a).
Legal Issues Presented
- Whether notional interest on an interest-free security deposit received by an assessee in connection with letting of property can be taken into account in cases falling under section 23(1)(b) of the Income-Tax Act, 1961 — i.e., whether such notional interest forms part of the "actual rent received or receivable" within section 23(1)(b).
- What is the proper scope of "receivable" in section 23(1)(b) — whether it can include notional advantages, or is limited to payment of actual annual rent (including arrears) to the assessee.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Satya Co. Ltd., [1994] 75 Taxman 193 (Calcutta High Court) | Held that when annual value is decided under section 23(1)(a) with reference to fair rent, that fair rent takes everything into consideration; but under section 23(1)(b) only the actual rent received or receivable can be taken into account and not any notional advantage. | The Court relied on this precedent to support the proposition that notional advantages (such as notional interest) are not includible within actual rent under section 23(1)(b), in line with the Tribunal's factual finding that actual rent exceeded fair rent without adding notional interest. |
| CIT v. M. Ratanchand Chordia, [1997] 228 ITR 626 (Madras High Court) | Held that in cases under section 23(1)(b) the annual value shall be determined only on the basis of the actual rent received. | The Court cited this authority to reinforce that section 23(1)(b) looks to actual rent received and does not permit inclusion of notional advantages like notional interest. |
Court's Reasoning and Analysis
The Court analysed the statutory scheme governing income from house property. It noted that section 22 measures income from house property by reference to its annual value, and that the annual value is to be determined under section 23. By amendment (Taxation Laws (Amendment) Act, 1975) section 23(1) was given two limbs:
- Clause (a) — annual value is the sum for which the property might reasonably be expected to be let (fair rent or standard rent); and
- Clause (b) — where the property is let and the actual rent received or receivable is in excess of the sum under clause (a), the annual value is the actual rent received or receivable.
The Court explained that clause (b) was inserted to deal with instances where actual rent exceeds the lawful/fair rent under rent control legislation, and therefore clause (b) contemplates that the annual value should be decided on the basis of the actual rent received. The Court emphasised that the Department in this case specifically invoked section 23(1)(b) and did not rely on section 23(1)(a).
On the facts, the Tribunal had recorded a categorical finding that the actual rent received by the assessee, even without adding the notional interest, exceeded the annual value determinable under section 23(1)(a). That factual finding was not challenged by the Department on appeal. Given that conclusion, the Court reasoned that section 23(1)(b) must be applied and, because section 23(1)(b) refers to actual rent received or receivable, notional advantages such as notional interest are outside its scope.
The Court further analysed the word "receivable" in section 23(1)(b), stating that it denotes payment of actual annual rent to the assessee and that arrears of actual rent would fall within "receivable" when read in context with "received". However, "receivable" does not extend to notional benefits; accordingly notional interest cannot be treated as part of actual rent within section 23(1)(b).
The Court explicitly left open the separate question whether notional interest could be taken into account in determining the fair rent under section 23(1)(a); that question was not before the Court because the Department had not relied on section 23(1)(a) and the Tribunal's factual finding made section 23(1)(b) applicable.
Holding and Implications
HOLDING: For the facts of this case, the Court dismissed the appeal and upheld the Tribunal's conclusion that notional interest on an interest-free deposit cannot be taken into account under section 23(1)(b) of the Income-Tax Act. The appeal is dismissed.
Implications:
- Direct effect: The Tribunal's allowance of the assessee's appeal stands; the Department's attempt to include notional interest in the annual value under section 23(1)(b) is rejected in this case.
- Scope of ruling: The Court emphasised that this judgment is based on the facts of the present case and noted that it is not deciding whether notional interest could be included in fair rent under section 23(1)(a); that question remains open. Thus the decision does not purport to resolve the separate issue under section 23(1)(a) and should be read as applying where the facts are such that section 23(1)(b) is the operative provision because actual rent exceeds fair rent without including notional interest.
- Interpretive consequence: Under section 23(1)(b) "actual rent received or receivable" refers to payment of actual annual rent (including arrears), and does not extend to notional advantages such as notional interest on an interest-free deposit.
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 section 23(1)(b) of the Income-Tax Act, 1961? In other words, whether notional interest would form part of actual rent received or receivable under section 23(1)(b)?
2. The facts giving rise to this appeal, briefly, are as follows: 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.
3. The said premises were 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 per cent, per annum, i.e, at the rate at which the assessee borrowed funds. The above order of the Assessing Officer was confirmed in appeal by the Commissioner of Income-Tax (Appeals). 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 section 23(1)(a), but the real issue was as to what constituted rent for the purposes of section 23(1)(b) of the Income-Tax Act? 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 section 23(1)(a) of the Act and it is for this reason that the Department invoked only section 23(1)(b) of the Act. The Tribunal concluded that section 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 section 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 the notional interest cannot be taken into account under section 23(1)(b). Being aggrieved, the Department has come in appeal under section 260A of the Income-Tax Act.
4. 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 section 23(1)(b) of the Act which is not in dispute. The Department has not invoked section 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 section 23(1)(a) of the Act. It is in this factual background that we are required to consider the scope of section 23(1)(b) of the Income-Tax Act. In the case of CIT v. Satya Co. Ltd., [1994] 75 Taxman 193, a Division Bench of the Calcutta High Court has held that when the annual value is decided under section 23(1)(a) of the Income-Tax'Act with reference to the fair rent, then the said fair rent takes into consideration everything. However, under section 23(1)(b) of the Income-Tax Act, only the actual rent received or receivable can be taken into consideration and not any notional advantage. Similarly, in the case of CIT v. M. Ratanchand Chordia, [1997] 228 ITR 626, it has been held by the Madras High Court that in cases of section 23(1)(b), the annual value shall be determined only on the basis of the actual rent received.
5. In this matter, 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 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 reasonably 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. As stated hereinabove, in this case, the Department has invoked section 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 section 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 section 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, section 23(1)(b) was applicable. They have not relied on the provisions of section 23(1)(a). The question as to whether notional interest could have been taken into account under section 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 section 23(1)(b) of the Income-Tax Act. It is important to note that the property is covered by the provisions of the Bombay Rent Act. The scheme of section 23(1)(b), in contradistinction to section 23(1)(a), shows that the fair rent is the basis to determine the annual value of a property. This was the sole basis prior to the assessment year 1975-76. However, after the amendment of section 23(1) by the Taxation Laws (Amendment) Act, 1975, the Legislature has clearly laid down under section 23(1)(b) that when the actual annual rent received or receivable is in excess of the fair rent determinable under section 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 section 22, the measure of income from house property is its annual value. The annual value is to be decided in accordance with section 23(1). By virtue of the amendment, 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 whereas 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 reasonably be expected to be let from year to year. In our view, this later insertion of clause (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 section 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., 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 by the lessor 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. 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.
6. Before concluding we may point out that under section 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 section 23(1)(b) and it is for this reason that the Word “receivable” must be read in the context of the word “received” in section 23(1)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by section 23(1)(b) of the Act. We once again repeat that whether such notional interest could form part of the fair rent under section 23(1)(a) is expressly left open.
7. For the above reasons, the appeal is dismissed.
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