2

For the assessment year under dispute, assessee filed its return of income declaring loss of Rs.3,59,26,295/- under the normal provisions of the Act and computed book profit at Nil under section 115JB of the Act. In course of assessment proceedings, the assessing officer, while verifying the computation of income furnished by the assessee noticed that assessee had shown net income from house property at Rs.4,06,000/-. On verifying the rent agreement, the assessing officer noticed that the assessee has let out Flat No.214 admeasuring 3475 sq.ft. with two reserved car parking at NCPA Apartment, Nariman Point, Mumbai at Rs.50,000/- per month. However, as per the terms of the agreement, the licencee has to deposit a refundable deposit of Rs.5 crores with the assessee. After calling for information under section 133(6) of the Act from the housing society and making further enquiry, the assessing officer found that the market value of the rent in the particular area is between Rs. 4 to 4.9 lakhs per month. Thus, he was of the view that the assessee, in lieu of the reduced rent, has received refundable deposit of Rs. Crores. Accordingly, he issued a show cause notice to the assessee to explain why 10% of the refundable deposit should not be added back to the rent actually received. Though, the assessee objected to the proposed addition; however, rejecting the objection of the assessee, the assessing officer computed the rental income at Rs.5 lakhs for 11 months and determined the net income from house property at Rs.38,50,000/-. Assessee contested the aforesaid addition before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) confirmed the addition made by the assessing officer. While doing so, he relied upon a decision of the Hon'ble Punjab & Haryana High Court in CIT vs K Streetlite Electric Corporation (336 ITR 723) (P&H).

3

4. The learned counsel for the assessee submitted, as per the rent agreement the assessee has actually received Rs.50,000/- per month towards rent. He submitted, though, the assessee has received interest free security deposit of Rs.5 crores; however, notional rent/interest cannot be computed based on such interest free security deposit received by the assessee. He submitted, before the departmental authorities the assessee has furnished evidence to show that the ratable value determined by Mumbai Municipal Corporation for the property is Rs.1,23,302/- per annum, whereas, the assessee has shown rental income of Rs.5,80,000/-, which is much higher than the municipal valuation. Further, he submitted, the assessing officer made independent enquiry to ascertain the market value of the rent. However, no such information was confronted to the assessee either in course of assessment proceedings or proceedings before learned Commissioner (Appeals).

5. Without prejudice, he submitted, the information obtained from the website of magicbrics.com cannot be considered to be a comparable data as it was on a subsequent date. He submitted, neither the assessing officer, nor learned Commissioner (Appeals) have made any enquiry to ascertain whether the municipal ratable value is the actual fair market value prevailing at the relevant point of time. In support of his contention, learned counsel relied upon the following decisions:-

1. J.K. Investors (Bom) Ltd vs Dy.CIT (2000) 74 ITD 274 (Mum)(Trib)

2. CIT vs Tip Top Typography ITA No.1213 of 2011, dt 8/8/2014 (Bom HC)

3. CIT vs Moni Kumar Subba ITA No.803 of 2007 dt 30/3/2011 (Delhi HC) 4.Shri Owais Hussain vs ITO ITA No.4320/M/2016 A.Y. 2006-07 dt.11/05/2018 (Mum)(Trib)

4

5.Pankaj Wadhwa vs ITO (2019) 101 taxmann.com 161 (Mum)(Trib)

6. Marg Ltd vs CIT (2020) 120 taxmann.com 84 (Mad)(HC)

7. Maxopp Investment Ltd vs CIT (2018) 91 taxmann.com 154 (SC)

6. Strongly relying upon the observations of the assessing officer and learned Commissioner (Appeals), learned departmental representative submitted that to reduce the rental income, the assessee has received interest free security deposit of Rs.5 crores. He submitted, the assessing officer has made effective enquiry to establish that the market value of the rent is much higher than what the assessee has offered. Thus, he submitted, there is no reason to interfere with the decision of departmental authorities. Without prejudice, he submitted, if the assessing officer has not confronted the enquiry conducted by him to the assessee, then the issue may be restored back to the assessing officer for fresh adjudication.

7. We have considered rival submissions in the light of decisions relied upon and perused materials on record. Undisputedly, as per the lease and licence agreement the property was let out for a monthly rent of Rs.50,000/-. It is also a fact that in terms with the lease and licence agreement, the assessee has received interest free refundable security deposit of Rs.5 crores. It is a fact on record that the assessing officer has computed notional rent @10% of the security deposit received by the assessee. To justify such determination, the assessing officer has referred to certain enquiry conducted by him by issuing notices under section 133(6) as well as through the website of magicbric.com. Whereas, the assessee has furnished evidence to show that the municipal ratable value is much less than the rental income declared by the assessee.

8. The issue arising for consideration is, whether the departmental authorities can substitute the actual rent received by the assessee by computing notional

5

rent. In case of J.K. Investors (Bom) Ltd vs Dy.CIT (supra), the Tribunal has held that the benefit of the security deposit does not accrue to the lessor at the time of receipt, but only on utilization of the same. The Bench observed, when the income derived on utilization of the security deposit is otherwise taxable, there is no justification to hold that the assessee received the security deposit anticipating that certain benefit would be received. In case of CIT vs Tip Top Typography (supra), the Hon'ble jurisdictional High Court while dealing with an identical issue has concurred with the following observations of the Full Bench of the Hon'ble Delhi High Court:-

" With this, we revert back to the moot question, viz. how to determine the

"fair rent" of the property and then to find out as to whether actual rent received is less or more than the fair rent" so that higher of two is taken as annual letting value under Section 23(1)(b) of the Act. For this purpose, we first discuss the validity of approach taken by the AO, viz., whether it is permissible to add notional interest of interest free security deposit and add the same to the same to the actual rent received for arriving at annual letting value. Even the Division Bench while making reference did not countenance the aforesaid formula adopted by the AO as is clear from Para 12 of the reference order wherein it is observed as under:

"12.In this backdrop, the important question which arises for determination is: what is the fair rent of the properties, which were let out in the instant case? The mistake committed by the AO was that he did not address this issue and straightway proceeded to add notional interest on the interest free security deposit.

The aforesaid conclusion is correct. We may record that permissibility of adding notional interest into actual market rent received was not approved by the Calcutta High Court in the case of Commissioner of Income Tax Vs. Satya Co. Ltd [(1997) 140 CTR (Cal) 569] and categorically rejected in the following words:

"There is no mandate of law whereby the AO could convert the depression in the rate of rent into money value by assuming the market rate of interest on the deposit as the further rent received by way of benefit of interest-free deposit. But s. 23, as already noted, does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. This situation is, however, foreseen by Schedule III to the WT Act and it authorizes

6

computation of presumptive interest at the rate of 15 per cent. as an integral part of rent to be added to the ostensible rent. No such provision, however, exists in the Act. That being so, the act of the AO in presuming such notional interest as integral part of the rent is ultra vires the provision of s. 23(1) and is, therefore, unauthorized. Though what has been urged on behalf of the Revenue is not to be brushed aside as irrational, yet the contention is not acceptable as the law itself comes short of tackling such fact situation."

This view of the Calcutta High Court has been accepted by a Division Bench of this Court as well in the case of Commissioner of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.) 84] holding that the notional interest on refundable security, if deposited, was neither taxable as profit or gain from business or profession under Section 28(iv) of the Act or income from house property under Section 23(1)(a) of the Act. Rationale given in this behalf was as under (page

493):

A plain reading of the provisions indicates that the question of any notional interest on an interest free deposit being added to the income of an assessed on the basis that it may have been earned by the Assessee if placed as a fixed deposit, does not arise. Section 28|(iv) is concerned with business income and is distinct and different from income from house property. It talks of the value of any benefit on perquisite, "whether convertible into money or not"

arising from "the business or the exercise of a profession." It has been explained by this Court in Ravinder Singh that Section 28(iv) can be invoked only where the benefit or perquisite is other than cash and that the term "benefit or amenity or perquisite" cannot relate to cash payments. In the instant case, the AO has determined he monetary value of the benefit stated to have accrued to the assessed by adding a sum that constituted 18% simple interest on the deposit. On the strength of Ravinder Singh, it must be held that this rules out the application of Section 28(iv) of the Act.

Section 23(1)(a) is relevant for determining the income from house property and concerns determination of the annual letting value of such property. That provision talks of "the sum for which the property might reasonably be expected to let from year to year," This contemplates the possible, rent that the property might fetch and not certainly the-interest in fixed deposit that may be placed by the tenant with the landlord in connection with the letting out of such property. It must be remembered that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. The attempt by learned counsel for the Revenue-to draw an analogy from the Wealth Tax Act, 1957 is also to-no avail. It is an admitted position that there is a specific provision in the Wealth Tax Act which provides for considering of a notional interest whereas Section 23(1)

(a) contains no such specific provision."

7

We approve the aforesaid view of the Division Bench of this Court and Operative words in Section 23 (l)(a) of the Act are "the sum for which the property might reasonably be expected to let from year to year". These words provide a specific direction to the Revenue for determining the "fair rent". The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the "fair/market rent" because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise m that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at a "fair rent". The Provisions of Section 23(1) (a) do not mandate this. The Division Bench in Asian Hotels Limited [2010] 323 ITR 490 (Delhi), thus, rightly observed that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd.,[(2001) 248 ITR 723 (Bom.)] categorically rejected the formula of, addition of notional interest while determining the "fair rent".

It is, thus, manifest that various Courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in Asian Hotels Limited [2010] 323 ITR 490 (Delhi).

The next question would be as to whether the annual letting value fixed by the Municipal Authorities under the Delhi Municipal Corporation Act can be the basis of adopting annual letting value for the purposes of Section 23 of the Act. This question was answered in affirmative by the Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569 on the ground that the provisions contained in the Delhi Municipal Corporation Act for fixing annual letting value is in pari materia with Section 23 of the-Act. The Court opined that the fair rent fixed under the Municipal laws, which takes into consideration everything would form the basis of arriving at annual value to be determined-under Section23(1)

(a) and to be compared with actual rent and notional advantage in the form of notional interest on interest free security deposit could not be taken into consideration. It is clear from the following discussion therein:

"6. With regard to question Nos. (5) and (6) which are only for the assessment years 1984-85 and 1985-86 the further issue involved is whether any addition to the annual rental value can be made with reference to any notional interest on the deposit made by the tenant. When the annual value is determined under sub-section (1) of section 23 with reference to the to such value no further addition can be made. The fair rent, takes into consideration everything. The notional interest on the deposit is not any actual rent received or

8

receivable. Under sub-clause (b) of section 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money which is payable by the tenant for use of the premises to the landlord. Any advantage and/or perquisite cannot be treated as rent. Wherever any such perquisite or benefit is sought to be treated as income, specific provisions in that behalf have been made in the Act by including such benefit, etc., in the definition of the income under section 2(24) of the Act. Specific provisions have also been made

under different heads for adding such benefits or perquisites as income while computing income under those heads, e. g..salary, business. The computation of the income under the head 'House property' is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefore is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of/common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope of justification whatsoever for making any addition for any notional interest for determining the annual value. Whatever benefit or advantage which is derived from the deposits - whether by way of saving of interest or of earning "Interest or making profits by investing such deposit - the same would be reflected in computing the income of the assessee under other heads.

In our view there is no scope for making any addition on account of so- called notional interest on the deposit made by the tenant, since there is no provision to this effect in s. 22 or 23 of the IT Act, 1961."

In fact, this is the view taken even by the Supreme Court in the case of Mrs. Shiela Kaushish Vs. CIT [1981] 131 ITR 435 on account of similarity of the provisions under the municipal enactments and Section 23 of the Act. It is on this basis that in the present case, the Commissioner of Income Tax (Appeals) gave primacy to the rateable value of the property fixed by the Municipal Corporation of Delhi vide its assessment order dated December 31, 1996 and on this basis, opined that the actual rent was more than the said rateable value and therefore, as per section 23(1)(b), the actual rent would be the income from house property and there could not have been any further additions.

Since the provisions of fixation of annual rent under the Delhi Municipal Corporation Act are in pari materia of Section 23 of the Act, we are inclined to accept the aforesaid view of the Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569 that in such circumstances, the annual value fixed by the Municipal Authorities can be a rational yardstick. However, it would be subject to the condition that the annual value fixed bears a dose proximity with the

9

assessment year in question in respect of which the assessment is to be made under the Income Tax laws.

If there is a change in circumstances because of passage of time, viz., the annual value was fixed by the Municipal Authorities much earlier in point of time on the basis of rent than received,this may not provide a safe yardstick if in the Assessment Year in question when assessment is to be made under Income Tax Act. The property is let-out at a much higher rent. Thus, the Assessing Officer in a given case can ignore the municipal valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the "fair rent" in the market and there is sufficient material on record for different valuation. We may profitably reproduce the following observations of the Supreme Court in the case of Corporation of Calcutta Vs. Smt. Padma Debi,

AIR 1962 SC 151, 153.

"A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness"

Thus the rateable value, if correctly determined, under the municipal laws can be taken as ALV under Section 23(l)(a) of the Act. To that extent, we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value not binding on the assessing officer. If the assessing officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. Commissioner Of Income-Tax, Bihar. [1975] 101 ITR 810. The above discussion leads to the following conclusions:

(i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances.

(ii) An inflated or deflated rent based on extraneous,, consideration may take it out of the bounds of reasonableness.

(iii) Actual rent received, in normal circumstances would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration.

(iv) Such ALV, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property.

(v) if standard rent has not been fixed by the Rent Controller, then it is the duty of the-assessing officer to determine the standard rent as per the provisions of rent control enactment.

(vi) The standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV not the standard rent.

10

We would like to remark that still the question remains as to how to determine the reasonable/fair rent. It has been indicated by the Supreme Court that extraneous circumstances may inflate/deflate the "fair rent". The question would, therefore, be as to what would be circumstances which can be taken into consideration by the Assessing Officer while determining the fair rent. It is not necessary for us to give any opinion in this behalf, as we are not called upon to do so in these appeals. However, we may observe that no particular test can be laid down and it would depend on facts of each case. We would do nothing more than to extract the following passage from the Supreme Court judgment in the case of Motichand Hirachand Vs. Bombay Municipal Corporation, AIR

1968 SC 441, 442 :

"It is well-recognized principle in rating that both gross value and net annual value are estimated by reference to the rent at which the property might reasonably be expected to let-from year to year. Various methods of valuation are applied in order to arrive at such hypothetical rent, for instance, by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to the profits carried from the property /or to the cost of construction."

9. Having done so, the Hon'ble Jurisdictional High Court held as under:-

"47. We are of the view that where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements. These are usually for fixed periods and renewable. In such cases as well, the conceded position is that the Annual Letting Value will have to be determined on the same basis as noted above. In the event and as urged before us, the security deposit collected and refundable interest free and the monthly compensation shows a total mismatch, or does not reflect the prevailing rate or the attempt is to deflate or inflate the rent by such methods, then, as held by the Delhi High Court, the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position. He must not make a guess work or act on conjectures and surmises. There must be definite and positive material to indicate that the parties have suppressed the-prevailing rate. Then, the enquiries that the Assessing Officer can-make would be for ascertaining the going rate. He can make a comparative study and make a analysis. In that regard, transactions of identical or similar nature can be ascertained by obtaining the requisite details. However, there also the Assessing Officer must safeguard against adopting the rate stated therein straightway. He must find

11

out as to whether the property which has been let out or given on leave and license basis is of a similar nature, namely, commercial or residential. He should also satisfy himself as to whether the rate obtained by him from the deals and transactions and documents in relation thereto can be applied or whether a departure therefrom can be made, for example, because of the area, the measurement, the location, the use to which the property-has been put, the access thereto and the special advantages or benefits. It is possible that in a high rise building because of special advantages and benefits an office or a block on the upper floor may fetch higher returns or vice versa. Therefore, there is no magic formula and everything depends upon the facts and circumstances in each case. However, we emphasize that before the Assessing Officer determines the rate by the above exercise or similar permissible process he is bound to disclose the material in his possession to the parties. He must not proceed to rely upon the material in his possession and disbelieve the parties. The satisfaction of the Assessing Officer that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship and other considerations makes it unreasonable must precede the undertaking of the above exercise. After the above ascertainment is done by the Officer he must, then, comply with the principles of fairness and justice and make the disclosure to the Assessee so as to obtain his view.

48. We are not in agreement with Shri Chhotaray that the municipal rateable value cannot be accepted as a bonafide rental value of the property and it must be discarded straightway in all cases. There cannot be a blanket rejection of the same. If that is taken to be a safe guide, then, to discard it there must be cogent and reliable material.

49] We are of the opinion that market rate in the locality is an approved method for determining the fair rental value but ,it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. We are of the view that municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. It is definitely a safe guide.

50] We have broadly agreed with the view taken by the Full Bench of the Delhi High Court. Hence, the issue of determination of the "fair rental value" in respect of properties not covered by or covered by the Rent Control Act is .to be undertaken in terms of the law laid down in the Full Bench decision of the Delhi High Court."

10. In case of CIT vs Moni Kumar Subba (supra), the Honourable Delhi High Court while dealing with an identical issue has held as under:-

"9. Before we proceed to answer the aforesaid questions, we may recapitulate here the admitted position in these appeals:

12

(a) In all these cases in addition to contractual rent, substantial amount by way of interest free security is given. The security deposit is many times more than the annual rent received by the assessee.

(b) Nonetheless, the annual Jetting value arrived at by the Municipal Corporation is less than the contractual rent received by these assessees.

(c) The AO while arriving at the 'fair rent' has added notional interest on the aforesaid security to the actual rent received to arrive at the annual letting value.

(d) In none of these cases, the provisions of Delhi Rent Control Act apply. Therefore, question of fixing of standard rent as per the formula laid down in Delhi Rent Control Act would not be relevant. We are making these remarks for the reason that it is an admitted position if the property is covered by the Delhi Rent Control Act, then the standard rent under the said Act could be treated as 'fair rent' in view of various judgments. The counsel for the parties conceded to this position and therefore, we need not elaborate on this, more so when it does not even arise for consideration.

10. With this, we revert back to the moot question, viz., how to determine the 'fair rent' of the property and then to find out as to whether actual rent received is less or more than the 'fair rent' so that higher of two is taken as annual letting value under Section 23 (1) (b) of the Act. For this purpose, we first discuss the validity of approach taken by the AO, viz., whether it is permissible to add notional interest of interest free security deposit and add thesame to the actual rent received for arriving at annual letting value. Even the Division Bench while making reference did not countenance the aforesaid formula adopted by the AO as is clear from Para 12 of the reference order wherein it is observed asunder:

"12. In this backdrop, the important question which arises for determination is: what is the fair rent of the properties, which were let out in the instant case? The mistake committed by the AO was that he did not address this issue and straightway proceeded to add notional interest on the interest free security deposit.........."

11. The aforesaid conclusion is correct. We may record that permissibility of adding notional interest into actual market rent received was not approved by the Calcutta High Court in the case of Commissioner of Income Tax Vs. Satya Co. i.td.[(1997) 140 CTR (Cal) 569] and categorically rejected in the following words:

"There is no mandate of law whereby the AO could convert the depression in the rate of rent into money value by assuming the market rate of interest on the deposit as the further rent received by way of benefit of interest-free deposit. But s. 23, as already noted, does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. This situation is, however, foreseen by Schedule III to the WT Act and it authorises computation of presumptive interest at the rate of 15 per cent, as an integral part of rent to be added to the ostensible rent, No

13

such provision, however, exists in the Act. That being so, the act of the AO in presuming such notional interest as integral part of the rent is ultra vires the provision of s. 23(1} and is, therefore, unauthorised. Though what has been urged on behalf of the Revenue is not to be brushed aside as irrational, yet the contention is not acceptable as the law itself comes short of tackling such fact-situation."

12. This view of the Calcutta High Court has been accepted by a Division Bench of this Court as well in the case of Commissioner of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.) 84] holding that the notional interest on refundable security, if deposited, was neither taxable as profit or gain from business or profession under Section 28(iv) of the Act or income from house property under Section 23(l}(a) of the Act. Rationale given in this behalf was as under:

"A plain reading of the provisions indicates that the question of any notional interest on an interest free deposit being added to the income of an assessed on the basis that it may have been earned by the Assessee if placed as a fixed deposit, does not arise. Section 28 (iv) is concerned with business income and is distinct and different from income from house property. It talks of the value of any benefit on perquisite,

"whether convertible into money or not" arising from "the business or the exercise of a profession." It has been explained by this Court in Ravinder Singh that Section 28 (iv) can be invoked only where the benefit or perquisite is other than cash and that the term "benefit or amenity or perquisite" cannot relate to cash payments. In the instant case, the AO has determined the monetary value of the benefit stated to have accrued to the assessed by adding a sum that constituted 18% simple interest on the deposit. On the strength of Ravinder Singh, it must be held that this rules out the application of Section 28 (iv) of the Act.

9. Section 23(l)(a) is relevant for determining the income from house property and concerns determination of the annual letting value of such property. That provision talks of "the sum for which the property might reasonably be expected to let from year to year." This contemplates the possible rent that the property might fetch and not certainly the interest in fixed deposit that may be placed by the tenant with the landlord in connection with the letting out of such property, It must be remembered that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. The attempt by learned counsel for the Revenue to draw an analogy from the Wealth Tax Act, 1957 is also to no avail. It is an admitted position that there is a specific provision in the Wealth Tax Act which provides for considering of a notional interest whereas Section 23(l)(a) contains no such specific provision."

14

13. We approve the aforesaid view of the Division Bench of this Court and Operative words in Section 23 (l)(a) of the Act are "the sum for which the property might reasonably be expected to let from year to year". These words provide a specific direction to the Revenue for determining the 'fair rent'. The AO, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the 'fair/market rent' because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at a 'fair rent'. Provisions of Section 23(l)(a) do not mandate this. The Division Bench in Asian Hotels Limited (supra), thus, rightly observed that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd., [(2001) 248 ITR 723 (Bom.)] categorically rejected the formula of addition of notional interest while determining the 'fair rent' in the following manner:

"..........Before concluding we may point out that under Section (23)(1)(b), the word "receivable" denote5 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}(l)(b) and it is for this reason that the word "receivable" must be read in the context of the word "received" in Section(23)(l)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by Section (23)(l)(b) of the Act. We once again repeat that whether such notional interest could form part of the . ' fair rent under Section (23)(l)(a) is expressly left open."

14. It is, thus, manifest that various Courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in Asian Hotels Limited (supra),

15. The next question would be as to whether the annual letting value fixed by the Municipal Authorities under the Delhi Municipal Authority Act can be the basis of adopting annual letting value for the purposes of Section 23 of the Act. This question was answered in affirmative by the Calcutta High Court in Satya Co. Ltd. (supra) on the ground that the provisions contained in the Delhi Municipal Corporation Act for fixing annual letting value is pan materia with Section 23 of the Act. The Court opined that the fair rent fixed under the Municipal laws, which takes into consideration everything, would form the basis of arriving at annual value to be determined under Section 23(l)(a) and to be

15

compared with actual rent and notional advantage in the form of notional interest on interest free security deposit could not be taken into consideration. It is clear from the following discussion therein:

"6. With regard to question Nos. (5) and (6) which are only for the asst. yrs. 1984-85 and 1985-86 the further issue involved is whether any addition to the annual rental value can be made with reference to any notional interest on the deposit made by the tenant. When the annual value is determined under sub-cl. (a) of sub-s. (1) of s. 23 with reference to the fair rent then to such value no further addition can be made. The fair rent, takes into consideration everything. The notional interest on the deposit is not any actual rent received or receivable. Under sub-cl. (b) of s. 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money which is payable by the tenant for use of the premises to the landlord. Any advantage and/or perquisite cannot be treated as rent. Wherever any such perquisite or benefit is sought to be treated as income, specific provisions in that behalf have been made in the Act by including such benefit, etc., in the definition of the income under s. 2(24) of the Act. Specific provisions have also been made under different heads for adding such benefits or perquisites as income while computing income under those heads, e.g., salary, business. The computation of the income under the head House property is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefore is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is ailowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope or justification whatsoever for making any addition for any notional interest for determining the annual value. Whatever benefit or advantage which is derived from the deposits - whether by way of saving of interest or of earning interest or making profits by investing such deposit - the same would be reflected in computing the income of the assessee under other heads. In our view there is no scope for making any addition on account of so- called notional interest on the deposit made by the tenant, since there is no provision to this effect in s. 22 or 23 of the IT Act, 1961."

16. In fact, this is the view taken even by the Supreme Court in the case of Shlela Kaushish Vs. CIT [1981] 131 ITR 435 (SC) on

account of similarity of the provisions under the municipal enactments and Section 23 of the Act.

16

17. It is on this basis that in the present case, the CIT (A) gave primacy to the rateable value of the property fixed by the Municipal Corporation of Delhi vide its assessment order dated 31.12.1996 and on this basis, opined that the actual rent was more than the said rateable value and therefore, as per Section 23 (l){b), the actual rent would be the income from house property and there could not have been any further additions."

11. In case of Shri Owais Hussain vs ITO (supra), the co-ordinate bench has followed the decision of Hon'ble High Court in case of Tip Top Typography (supra) and has directed the assessing officer to compute the deemed rent as per municipal rateable value. The Hon'ble Court has held that based on cogent material the assessing officer must come to a definite conclusion that parties have concealed the real position. The Hon'ble Court has further held that Municipal rateable value cannot be discarded straightaway, unless, there is cogent and reliable material to do so. Thus, the ratio that follows from the aforesaid decisions is: the assessing officer cannot determine notional rent based on estimation / guess work. In the facts of the present appeal, the assessee has furnished the municipal rateable value which is much less than the rental income offered. Further, the assessing officer has not brought any concrete evidence on record to demonstrate that parties have concealed the real position. That being the case, no further addition can be made to the rental income by computing notional rent based on the interest free security deposit. In view of the aforesaid, we delete the addition made by the assessing officer.

12. In ground 2 assessee has challenged the disallowance of expenditure under section 14A read with rule 8D.

13. We have considered rival submissions and perused materials on record. The undisputed factual position emerging from record reveals that during the year under consideration, the assessee has not earned any exempt income.

17

Therefore, in absence of any exempt income earned by the assessee, no disallowance under section 14A r.w.r.8D can be made. This is a fairly well settled legal principle enunciated in a number of judicial precedents including the decision of the Hon'ble jurisdictional High Court in case of Principal Commissioner of Income-tax vs M/s Ballarpur Industries Ltd in Income Tax Appeal No.51 of 2016 judgment dated 13-05-2016. Thus, respectfully following the decision of the Hon'ble jurisdictional High Court as referred to above, we delete the addition made by the assessing officer. This ground is allowed.

14. In ground 3 assessee has challenged the disallowance of interest expenditure amounting to Rs.3,15,03,366/-.

15. Briefly the facts are, in course of assessment proceedings, the assessing officer noticing that the assessee has debited interest expenses of Rs.3,42,09,589/-, called for the necessary details from the assessee and also called upon the assessee to justify the claim. As discussed by the assessing officer, from the material on record he found that the entire borrowings were from related parties and the assessee was used as a conduit for availing the loan from Mercator Ltd and lending to AHM Investments Pvt Ltd. Thus, alleging that the assessee was unable to establish that the interest expenditure was incurred for the purpose of business, the assessing officer disallowed it. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals). However, learned Commissioner (Appeals) confirmed the disallowance, though, he granted partial relief to the assessee by reducing an amount of Rs.27,03,226/- already disallowed under section 14A r.w.r.8D.

16. We have considered rival submissions and perused materials on record. The factual matrix clearly reveal that before the departmental authorities, the

18

assessee failed to furnish any evidence to demonstrate that the interest expenditure claimed as deduction was incurred for the purpose of business. This the factual position remains unaltered even before us. The onus is entirely on the assessee to establish on record that the interest expenditure claimed as deduction was incurred for the purpose of business. The assessee having failed to do so, the claim cannot be allowed. Accordingly, we do not find any reason to differ with the view expressed by the learned first appellate authority. This ground is dismissed.

17. In the result, appeal is partly allowed. Order pronounced on 18/11/2021. Sd/- sd/-

(G.S. PANNU) (SAKTIJIT DEY)

PRESIDENT JUDICIAL MEMBER

Mumbai, Dt : 18/11/2021 Pavanan

Copy to :

1. Appellant

2. Respondent

3. The CIT concerned

4. The CIT(A)

5. The DR, ITAT, Mumbai

6. Guard File /True copy/ By Order Asstt. Registrar, ITAT, Mumbai

19