1. The appeal of the assessee, for asst. yr. 1992-93, is directed against the order dt. 4th December, 1995, of CIT(A)-XXXIII, Mumbai. The only issue involved in this case is as to whether the notional interest on the interest-free deposit received by the assessee from the tenant is assessable as part of the rent received or receivable within the meaning of s. 23(b). Rival contentions have been heard and records perused.
2. The relevant facts, in this case, are that the appellant-company during the previous year relevant to asst. yr. 1992-93 purchased second and third floor of "B" Wing in the building known as 'Mahindra Towers' from M/s. Mahindra & Mahindra Ltd. vide sale deed executed on 28th June, 1991. For the constructed area of 25,663 sq. ft. the consideration was Rs. 10,90,63,750. The total purchase price of the property including stamp papers, stamp duty, legal fees, etc., was Rs. 12,03,69,675. The said premises was let out to M/s. Raymond Woollen Mills Ltd., a sister concern, w.e.f. 1st October, 1991. Though the possession of the property was taken over by the said concerned on 1st October, 1991, the written agreement was executed on 17th June, 1992.
The agreement was initially for a period of three years with retrospective effect from 1st October, 1991, on a monthly rent of Rs. 5,13,260. The period of lease was extendable by mutual consent for two further periods of three years each upon such terms and conditions as may be decided. The lessor agreed to bear the property taxes and maintenance charges of the property while the lessee undertook to meet the expenses for electricity consumed by them. The lessee agreed to deposit with the lessor an amount of Rs. 15,39,780 as a security deposit for the due performances of the lessees. The lessors were entitled to recoup any loss etc., caused by damage to property, etc.
from such deposit. By another agreement entered into on the same date, the assessee-company had agreed to permit the lessee to use certain amenities during the period of the lease in return for a monthly compensation of Rs. 8,08,205. The lessor had obtained further security deposit of Rs. 26,94,815 on the same terms as in the case of the lease of property. The assessee was not to pay any interest to the lessees on the security deposits. The amenities mentioned in the Schedule to the agreement are right of entry into the leased premises through staircase, etc., central air-conditioning, provision for supply of water, electricity, drainage, sanitation, open space, gardens, etc.
There were two more agreements executed on 17th June, 1992 by virtue of which the two advances of Rs. 2,96,40,765 and Rs. 1,69,37,580 were converted into a deposit in consideration of the lessor agreeing to grant lease of property to the lessee and to use certain amenities attached to the premises. The lessee agreed to convert such advances into interest-free deposit for the whole period of the lease for due observances of the terms and conditions of the lease by the lessee. The CIT(A) has pointed out that the assessee had purchased the property on 1st October, 1991, and had obtained an advance of Rs. 4.66 crores from M/s. Raymond Woollen Mills Ltd. in March, 1992. On 17th June, 1992, various agreements were entered into to regularise the transactions and further security deposit of Rs. 42.53 crores was taken. In the opinion of the CIT(A) various agreements had been executed in order to sub-divide the main transaction to avoid violation of Bombay Rents Hotel Lodging House Rates Control Act, 1947, according to which not more than three months rent could be taken as security deposit for due performance of the terms of the lease. As per one of the agreement the assessee-company had taken interest-free deposit equal to three years lease rent and, therefore, the necessity of different agreements is explained.
3. On these facts the AO came to the conclusion that the annual value of the property under s. 23(1) should be sum total of the rent receivable, i.e. Rs. 14,11,465 per month and also notional interest on the interest-fee deposit paid by the lessee. The AO relied upon the decision of the Tribunal in the case of Cygnus Nagri Investment Co. (I) Ltd. vs. ITO [ITA Nos. 3724 and 3725/Bom/1989]. He rejected the claim of the assessee that it is a business practice to take interest-free deposits from the lessee to secure proper fulfilment of the terms and conditions of the lease and that the notional interest was not assessable as income from house property under s. 23. The AO calculated the notional interest at the rate of 21.5 per cent, i.e., the rate at which the assessee had borrowed funds and deduction claimed out of the rental income.
4. The assessee appealed to the CIT(A) and contended that there was no justification for assessing the notional interest in respect of the security deposit received from the lessee as part of the annual rent received or receivable. Reliance was placed on the decision of the Calcutta High Court in the case of CIT vs. Satya Co. Ltd. (1994) 75 Taxman 193 (Cal). In this case their Lordships of the Calcutta High Court held that the notional interest on the deposit made by the tenant cannot be assessed as part of the rent under s. 22 or 23 of the Act.
5. The learned CIT(A) has expressed the view that the real issue in this case is not as to what is the annual value of the property under s. 23(1)(a) but what constitutes rent for the purpose of s. 23(1)(b), Relying upon the decision of the Bombay High Court in the case of CIT vs. Thana Electricity Supply Co. (1994) 206 ITR 727 (Bom), the learned CIT(A) has held that he was not bound to follow the decision of the Calcutta High Court. Reference has also been made by the CIT(A) to s.
105 of the Transfer of the Property Act which defines the term "lease" and "lease rent" and has come to the conclusion that the notional interest on the deposits is includible as part of the rent.
6. The learned counsel for the assessee relied upon the decision of the Bombay Bench of the Tribunal in the case of Dy. CIT vs. Birla International Ltd. [ITA No. 4902/Bom/1993, asst. yr. 1983-84, order dt.
29th January, 1996] holding that the notional interest on the deposits cannot be treated as part of the rent received or receivable for working out the annual letting value of the property. Reliance was also placed on the decision of the Bombay Bench of the Tribunal in the case of Super Leasing Co. Ltd. vs. Asstt. CIT (1996) 56 TTJ (Bom) 258, in support of the aforementioned proposition of law. The learned counsel for the assessee contended that the CIT(A) was not justified in not following the decision of the Calcutta High Court and the other decisions of the Bombay Bench of the Tribunal. It was contended that though the decision of the Calcutta High Court may not be binding upon the authorities working outside its territorial jurisdiction, yet it has a persuasive value. It was further contended that s. 105 of the Transfer of the Property Act does not support the view taken by the Revenue authorities that the notional rent on the security deposit is part of the rent. It was claimed by the learned counsel that the decision of the CIT(A) is contrary to the legislative intent. The legislature never intended to include the notional interest on the security deposit as part of the income. It was pointed out that there is a proposal in the Finance Bill of 1997 to include the notional interest at the rate of 12 per cent in the case of interest-free deposits of more than six months rent. It was contended that under the WT Act, Sch. III specifically provides for inclusion of notional interest at the rate of 15 per cent in computation of the annual value for determination of the value of the house property but as per the Income-tax law applicable for asst. yr. 1992-93 there is no provision for including the notional interest as part of rent for the purposes of s. 23(1)(b). It was accordingly contended that the addition made by the Revenue authorities may be deleted. Reliance was placed on the decision of the Bombay High Court in the case of CWT vs. State Bank of India (1995) 213 ITR 1 (Bom) in support of the contention that the wealth-tax provisions cannot be applied to the income-tax proceedings.
7. The learned Departmental Representative on the other hand contended that the decision of the Calcutta High Court is not binding upon the authorities working outside its territorial jurisdiction. In this connection he relied upon the decision of the Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) and that of the Delhi High Court in the case of Taylor Instrument Co. (India) Ltd. vs. CIT (1998) 232 ITR 771 (Del). It was contended that the decision of the Tribunal in the case of Satya Co. Ltd. (supra) may not be applicable in this case as one is not sure as to whether the provisions of Rent Control Act are attracted in that case. It was further contended that the word "rent" is not defined under the Act. Referring to provisions of s. 105 of the Transfer of the Property Act, the learned Departmental Representative contended that the rent is not restricted to the receipt in money but it includes the other benefits received by the assessee in consideration of letting out of the property. Reliance was also placed on the decision of the Calcutta High Court in the case of CWT vs.
Bhaskar Mitter (1993) 202 ITR 612 (Cal) in support of the contention that unless context otherwise requires the same meaning should be given to the same words used under different statutes. It was contended that the annual value is also referred to under the WT Act and it is specifically provided that the notional interest at the specified rate is to be taken into account in determining the annual letting value.
Same expression has been used in the IT Act and as such the definition under the WT Act is applicable in respect of the IT Act for ascertaining the meaning of annual value. It was also pointed out that since the Transfer of Property Act specifically defines rent, by virtue of the decision of the Calcutta High Court referred to above, such a definition would be available for defining the rent under the IT Act.
Reliance was also placed on the decision of the Gujarat High Court in the case of Shri Bipinbhai Vadilal Family Trust No. 1 vs. CIT (1994) 208 ITR 1005 (Guj) in support of the contention that the computation of annual value is dependent on the basis of return on value such as cost of construction etc. Reliance was also placed on the decision of the Allahabad High Court in the case of Sewa Ram Oil Mills vs. CIT (1994) 205 ITR 384 (All) wherein the case of letting out of the property to its own Directors was held to fall outside the purview of the Rent Control Act. In this case the property had been let out to the sister concern and the provisions of the Rent Control Act were not applicable.
The learned Departmental Representative further contended that the Finance Bill of 1997 providing for inclusion of notional interest on deposits may not have become a law but the same has got to be taken as clarificatory. Reliance was placed on the decision of the Bombay High Court in the case of CIT vs. Ashraf-Ur-Rehman Azimullah (1994) 209 ITR 341 (Bom) where in the case of an employee it was held that the interest on the deposit be deducted from the rental value of the property for the purposes of assessment of perquisite value of the property.
8. In counter reply the learned counsel for the assessee pointed out that wherever the legislature wanted they have specifically included the notional interest and the benefit received in kind in the definition of rent. Our attention was invited to s. 2(1A) defining agricultural income. The legislature has specifically included the rent received in kind also in the definition of income. Similarly, under s.
27(3)(1a) the part-performance as per s. 53A of the Transfer of Property Act is considered to be the transfer of property for purposes of assessment of annual value. Under the WT Act, specific provision has been incorporated for taking into account the notional interest on security deposit. Under the IT Act, the specific omission justifies the inference that the legislature never intended to include the notional interest in the definition of the interest. It was accordingly contended that the appeal of the assessee may be allowed.
9. We have given our careful consideration to the rival contentions.
Since the dispute relates to determination of annual letting value, it will be useful to reproduce s. 23 of the IT Act, 1961, which provides as to how the annual value is to be determined : "23. (1) For the purposes of s. 22, the annual value of any property shall be deemed to be :- (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in cl. (a), the amount so received or receivable.
10. Till asst. yr. 1975-76, s. 23 provided the definition of the annual value of a house property to be a sum for which the property might reasonably be expected to let from year to year. It was found that in certain cases the actual rent received was more than the standard rent but because of the definition of the annual letting value the difference between the actual rent received and the standard rent escaped taxation. Sec. 23 was accordingly amended and cl. (b) applicable from asst. yr. 1976-77 was incorporated. Now the AO has the choice of determining the annual letting value on the basis of the definition under cl. (a) and then comparing it with the actual rent received or receivable. In case the actual rent received or receivable is more than the annual value determined under cl. (a) of s. 23, then the AO has to adopt the actual rent received or receivable as the annual letting value of the property. On the other hand if the actual rent received or receivable is less than the annual value determined under cl. (a) of s. 23(1), then such value is to be adopted as the annual value of the property. In this case the actual rent received even without taking into account the notional interest is more than the annual value determinable under cl. (a) of s. 23. Therefore, as rightly observed by the CIT(A) the controversy in this case is not as to what is the sum for which the property might reasonably be expected to let from year to year as required under cl. (a) of s. 23(1). The value of the property in question is to be adopted under cl. (b) of s. 23(1) is not disputed. The dispute is revolving around the meaning of annual rent received or receivable. The word "rent" is not defined under the IT Act. The dictionary meaning of the "rent" is a periodical payment made by a tenant to an owner or landlord for the use of the land or building (The New Oxford Dictionary). Sec. 105 of the Transfer of the Property Act defines the term "lease" and "lease rent" as under : "A lease of immovable property is a transfer of a right to enjoy such property made for a certain time express or implied or in perpetuity in consideration of a price paid or promised or of money, a share of crops, service, or any other thing of value to be rendered periodically or on specified occasions to the transferor by the transferee who accepts the transfer on such terms.
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium and the money, share, service or the other thing to be so rendered is called the rent."State of Punjab vs. British India Corpn. 2 SCR 114, their Lordships of the Supreme Court held that any payment by the lessee as part of the consideration of the lease, is rent. When a lessee provides the tax collection charges in addition to rent such charges have been held to be really part of the rent. So also a stipulation to pay taxes payable by the lessor to form part of the rent. Similarly when the lessee agrees to pay the rent to the lessor and also to pay the lease rent payable to the Government or any other authority such sum would also be included in the definition of "rent".
The rent may not only be money but also delivery of chattels such as crops or share of the crops or rendering of services; partly in money and partly in kind. It, therefore, follows that the rent may not only include the money received in cash but may also include the chattels received in kind. However, in this case, the assessee has received money in cash but nothing has been received in kind. Therefore, the controversy as to whether the rent includes the money received in cash as well as in kind is of no consequence. The assessee has received the rent in cash. The amount of the deposit has also been received in cash.
The deposit is refundable to the lessee. Therefore, what has been passed on to the assessee in addition to the annual rent is a right to hold the deposit till the expiry of the lease. Since the deposit is refundable it cannot be said that the amount so received by the assessee is part of the rent. The same thing may not be true in respect of non-refundable deposits. But here is a cash of refundable deposit.
12. There is a perception that by receiving the interest-free deposit the lessor has received intangible benefit in the form of availability of funds free of interest. The question that requires to be answered is as to whether any benefit accrues to the assessee on receipt of the deposit and if so what is the time of accrual and the value of such benefit. Another question that arises is as to whether such a benefit will constitute rent received or receivable within the meaning of s.
23(1)(b). There is no doubt that on receipt of the deposit the avenues for deriving the benefit from such deposit are available to the lessor but the stage at which the benefit accrues to the lessor, in our view, is of utmost importance.
13. Sec. 23(1)(a) of the IT Act, 1961, permits adoption of notional value as the annual letting value of the property. Sec. 23(1)(b) refers to real income by way of rent received or receivable.
14. In working out the annual letting value under s. 23(1)(a) various factors are to be taken into account in arriving at the annual letting value. If the property is not subject to Rent Control Act, then it is permissible to take into consideration the factors such as actual rent received in respect of other properties in the same vicinity. It may also be permissible to take into account the actual rent paid by the lessee and the notional value of the security deposit paid by the lessee to the lessor (that is the cost to the lessee) and other surrounding circumstances. But the same is not true when s. 23(1)(b) is applied. Sec. 23(1)(b) refers to the actual rent received or receivable. The contention on behalf of the Revenue that the rent received or receivable may include anything received in kind also as provided under s. 105 of the Transfer of the Property Act, may be acceptable. There is no dispute about the actual rent received. There is also no dispute about the fact that the refundable deposit has been received by the lessor. Since the amount of deposit is refundable, it is nobody's case that the security deposit as such is to be treated as rent received or receivable. What is sought to be assessed is the benefit that is likely to be derived by the assessee by utilisation of the deposit during the period of the lease. It cannot be denied that the assessee is in a position to derive an advantage by getting the deposit. As we have already pointed out, that may be an important consideration while determining the notional value under s. 23(1)(a).
But one has to bear in mind that when the advantage of the security deposit is transformed into money/income it is taxable/taxed at the time of accrual.
15. For example, on receipt of the deposit the assessee has several options for utilising the same. The assessee may utilise the deposit for making a fixed deposit with the bank. The interest earned on the deposit will be the income of the assessee assessable in the year of accrual. Another option open to the assessee may be to utilise the security deposit in business. In such a case the assessee would be saving the cost of borrowings and to that extent the business income of the assessee will get enhanced. To explain it further, interest on borrowed capital is an allowable deduction in computing the income from business. When the assessee does not incur expenditure on borrowings by utilising the security deposit in business, the expenditure to that extent will be reduced and the business income accordingly enhanced. In that process the assessee would be paying tax in the year of accrual of benefit in respect of the security deposit. Another situation, the possibility of which may be remote but cannot be ruled out altogether is that the lessor may not utilise the deposit at all. The money may be kept in a locker in safe custody by treating the same strictly in trust. In that event no advantage will accrue to the lessor in terms of money.
16. Thus, on the analysis of the factors mentioned above, it becomes crystal clear that the benefit of the security deposit does not accrue to the lessor at the time of receipt but only on utilisation of the same. When the income derived on utilisation of the security deposit is otherwise taxable as explained above, is there any justification to hold that the benefit has been received in anticipation at the time of the receipt of the security deposit In our considered view the language of s. 23(1)(b) does not permit such an interpretation. The language of the said section is unambiguous. In the case of Smt.
Tarulata Shyam vs. CIT (1977) 108 ITR 345 (SC) their Lordships of the Supreme Court held that in interpreting a provision the Court must look merely at what is clearly said. The section refers to the rent received or receivable. It does not permit adoption of any notional value on the basis of any benefit that may accrue to the assessee in future. If assessment of the income accrued in future is allowed to be assessed under s. 23(1)(b) it will result to double taxation. On the one hand the estimated value will be assessed under s. 23(1)(b) and on the other hand the income accrued by utilisation of the deposit will also be separately assessed in the year of accrual. The intention of the legislature is not to tax the receipt twice - one at the time of receipt of the deposit and one at the time of actual accrual. In the case of K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC) their Lordships of the Supreme Court held that statutes must be so construed, if possible so that absurdity and mischief may be avoided. It is also well-settled principle of law that the provisions of the Act must be construed in a harmonious manner.
17. As already explained treating the notional value of the security deposit as rent received or receivable gives rise to absurdity - gives rise to double taxation and, therefore, such an interpretation is to be avoided. On the other hand, if the actual rent received is considered to be the actual rent for purposes of s. 23(1)(b) and the benefit which accrues to the assessee by utilisation of the security deposit is assessed in the year of accrual in accordance with other provisions of the Act, that will be just and reasonable. We hardly need to repeat that we are concerned with the interpretation of s. 23(1)(b) in order to ascertain the actual rent received or receivable. Sec. 23(1)(a) stands totally on a different footing as it permits adoption of notional value in such cases where Rent Control Act is not applicable.
In our view there is no scope for adoption of notional value under s.
23(1)(b) when it speaks of actual rent received or receivable.
18. Before we wind up, it may be necessary to refer and deal with the decisions cited at Bar in order to do justice to the contentions advanced before us.
19. We may first refer to the decision of the Bombay High Court in the case of State Bank of India (supra). In this case their Lordships of the Bombay High Court held that the provision in one statute cannot be interpreted with reference to similar provisions in another statute.
This decision supports the contention on behalf of the assessee that the definition of annual value adopted under Sch. III of the WT Act, 1957 is not applicable for the definition of annual value under the provisions of the IT Act. The decision of the Bombay High Court is binding upon us and all other authorities working under its jurisdiction. Therefore, the contention on behalf of the Revenue that the definition of the annual value adopted under the WT Act may also be adopted in interpreting the provisions of the IT Act, is not well founded. Respectfully following the aforementioned decision of the Bombay High Court, the contention on behalf of the Revenue is rejected.
It may also be pertinent to mention that the dispute involved in this appeal is not relating to the definition of the annual value as per the IT Act as such, but the real dispute is relating to the definition of rent. The word "rent" is not defined under the WT Act and therefore, the contention on behalf of the Revenue is liable to be rejected even on that ground.
20. The learned Departmental Representative had relied upon the decision of the Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) and also that of the Delhi High Court in the case of Taylor Instrument Co. (India) Ltd. (supra) in support of the finding of the CIT(A) that the decision of the High Court outside its territorial jurisdiction is not binding upon the authorities. Well, in view of the decision of the Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) the proposition of law that the decision of the High Court is binding on the subordinate Courts and authorities under its superintendence throughout the territories in relation to which exercises jurisdiction, therefore, we cannot find fault with the CIT(A) in not following the decision of the Calcutta High Court in the case of Satya Co. Ltd. (supra). However, there are two decisions of the Tribunal in the case of Birla International Ltd. (supra) and Super Leasing Ltd. (supra) where the issue has been decided in favour of the assessee. These decisions have not been considered by the learned CIT(A). The decision relied upon by the CIT(A) is an earlier decision and as held by the Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) when there are two different decisions of the same Court it is advisable to follow latter decisions of the Court. In such circumstances it was incumbent upon the CIT(A) to follow the latter decisions of the Bombay Benches of the Tribunal.
21. A reference was made to the decision of the Calcutta High Court in the case of Bhaskar Mitter (supra). In this case their Lordships held that where a word is not defined under the Act, the same expression having been defined in another enactment can be adopted. It was pointed out that the rent is defined under the Transfer of Property Act and, therefore, the same definition could be adopted for interpreting the same word under the IT Act. We have accepted this proposition of law and have considered the definition of rent under s. 105 of the Transfer of Property Act but found that it does not advance the case of the Revenue.
22. Reliance was placed on the decision of the Gujarat High Court in the case of Shri Bipinbhai Vadilal Family Trust No. 1 (supra). In this case their Lordships held that in determining the annual value the various factors such as location of the property, report of the approved valuer, return on value of property, would be justified. This decision is applicable in respect of the determination of the annual value under s. 23(1)(a). As already point out, the issue before us is as to what is the meaning of the rent received or receivable. The determination of value under s. 23(1)(a) is not in dispute. We have also clarified that the factors for determination of annual letting value under s. 23(1)(a) are several which may include the benefit of the security deposit. This is so because under s. 23(1)(a) a notional value is to be adopted. Therefore, this decision of the Gujarat High Court does not support the claim of the Revenue.
23. Similarly, the decision of the Allahabad High Court in the case of Sewa Ram Oil Mills (supra) relates to the determination of actual value within the meaning of s. 23(1)(a). In this case their Lordships of the Allahabad High Court held that when the property is utilised by own Directors of the company the Rent Control Act is inapplicable and the annual letting value is to be determined accordingly. In such circumstances the rental value of the adjacent property was held to be a relevant factor for determination of the annual letting value. This decision of the Allahabad High Court would be applicable for determination of the annual letting value under s. 23(1)(a) in respect of such properties where the Rent Control Act is not applicable. In the present case, as already clarified, the issue is somewhat different.
24. Another decision cited on behalf of the Revenue is the decision of the Bombay High Court in the case of Shri Ashraf-Ur-Rehman Azimullah (supra). In this case the issue before their Lordships of the Bombay High Court was the assessment of perquisite value in respect of the accommodation provided to the employee director. The AO had worked out the fair rental value of the flat provided to the Director at Rs. 3,000 per month. The perquisite value of the flat was assessed at Rs. 25,000.
The director claimed that he had given an interest-free deposit of Rs. 1,36,000 to the company and, therefore, in assessing the benefit derived by him this factor should also be taken into consideration.
Their Lordships of the Bombay High Court accepted the contention on behalf of the director and it was held that that the interest foregone on the deposit had to be taken into consideration in computing the perquisite value of the flat occupied by the assessee. This decision would be applicable when the notional value of the property is to be adopted. In adopting the notional value it is now well-settled that various factors are to be taken into account and the factor of interest-free security deposit may also be a relevant factor. But for purposes of s. 23(1)(b) the consideration is the actual rent received or receivable and there is no scope for taking into consideration any notional value. The aforementioned decision of the Bombay High Court, therefore, does not advance the claim of the Revenue.
25. On the final analysis we hold that the Revenue was not justified in assessing the notional value of the security deposit as part of the actual rent received or receivable within the meaning of s. 23(1)(b).
The AO is directed to recompute the income from house property accordingly.