S. 23(1)(a): Notional interest on deposit not includible in Annual Letting Value

Gagan Trading Co. Ltd vs. ACIT (ITAT Mumbai)

The assessee let out its property on a monthly rent of Rs. 1 per sq. ft. It also received Rs.78 crores as an interest-free deposit. The assessee claimed that as the municipal ratable value of the said Property was higher than the actual rent received the said municipal ratable value had to be taken as the ALV. The AO held that notional interest at the rate of 18% p.a. on the said deposits had to be added to the actual rent received so as to determine the ALV. The CIT(A) held that while the AO was wrong in adding the notional interest on the security deposit, the assessee was also wrong in insisting on the municipal rateable value to be the ALV. He held that the ALV had to be decided as per the rent fetched by similar properties located in the same vicinity. On cross appeals by both parties, HELD by the Tribunal:

As per Circular No.204 dated 24.7.1976 issued by the CBDT the expression “the sum for which the property might reasonably be expected to let from year to year” used in s. 23(1)(a) means the municipal valuation of the property. In Reclamation Reality, the Tribunal held, after considering the entire law on the subject, including the said Circular & M.V. Sonavala 177 ITR 246 (Bom) that the ALV had to be determined on the basis of either the Municipal rateable value (23(1)(a)) or the actual rent received (23(1)(b)), whichever is the higher. There is no scope for adding the notional interest on the security deposit to the ALV. Judicial propriety and judicial discipline require that this view be followed (CIT vs. Moni Kumar Subba 333 ITR 38 (Del) (FB) noted).