ITO v SHASTHA PHARMA LABORATORIES PVT LTD [ ITA No.83/2007 ; ITA No.84/2007] – Karnataka High Court

Background:

The assessee, for the assessment years 1998-99 and 1997-98 disclosed the lease rent income of Rs.6,00,000/-. The assessee had received Rs.80,00,000/- as lease rent deposit. The AO held that the interest on deposit should be taken into account for computation of the rent received by the assessee. Therefore, he assessed the annual letting value of Rs.20,40,000/- which includes notional interest in respect of the deposit. The CIT(A) dismissed the appeal filed by the assessee by upholding the order of the Assessing Authority.

Tribunal’s order [ITA No.106/Bang/2003 and ITA No.604/Bang/2005 dtd 11-8-2006]:

For the purpose of computing annual letting value of the property, the notional interest cannot be added.

HELD:

• Delhi High Court had an occasion to interpret this provision in the case of CIT v/s MONI KUMAR SUBBA reported in (2011) 333 ITR 38 (Delhi)(FB):
  The operative words in section 23(1)(a) of the Act are “the sum for which the property might reasonably be expected to be 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 this 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 the assessee has received an abnormally high interest-free security deposit and because of that, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, the notional interest on the interest free security cannot be taken as the determinative factor to arrive at a fair rent. The provisions of section 23(1)(a) do not mandate this. 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 addition of notional interest on the interest free security deposit to the rent agreed upon is not permissible in law.
• It is open to the Assessing Authority to take note of the amount of advance paid which gives an indication of the fair rent of the property that fetches in the market. But the interest accrued on such deposit cannot be added to the agreed rent, so as to make a fair rent or market rent.